Canada’s auto industry is exporting fewer vehicles and auto parts than the country imports.

Foreign Affairs Minister Chrystia Freeland says Canada doesn’t measure the value of trade in terms of deficits and surpluses. But U.S. President Donald Trump does, which is why Statistics Canada’s latest trade data will be more political than usual.

In the second quarter, Canada shipped goods to the United States worth $10.4 billion more than the stuff imported from its largest trading partner.

That’s a smaller surplus than the previous quarter, but still one of the wider gaps in recent years. One of the Trump administration’s main goals in triggering a renegotiation of the North American Free Trade Agreement was narrowing the U.S. trade deficits with Canada and Mexico. Washington will have taken note.

Why it matters

Freeland is right: surpluses and deficits are an overly simplistic way to measure the benefits of trade. A deficit can signal economic health because it suggests consumers are benefiting from cheaper goods and companies are investing in stuff they can’t purchase at home. But Trump and his chief trade negotiator, Robert Lighthizer, don’t see it that way. They treat trade data like the box score of a sports match. For them, a deficit means you are losing—and Trump doesn’t like to lose.

The trend

Canada’s trade surplus with the U.S. stands out because it runs a deficit with the rest of the world. Meanwhile, the shortfall in the current account, which tracks the flow of goods, services, and investment, widened to $16.3 billion in the second quarter from $12.9 billion over the first three months of the year and $11.7 billion in the fourth quarter. The previous two quarters now appear to be anomalies. For most of 2015 and 2016, the quarterly current-account deficit was $16.3 billion and $18.8 billion.

The surplus in goods trade with the U.S. was the smallest since the third quarter of 2016, as weaker prices decreased the value of oil exports. The average quarterly surplus in 2015 and 2016 was about $8.3 billion.

It is also worth noting that despite the overall deficit, receipts from the export of goods climbed to the highest according to records that date to 1981.

Glass half full

At the negotiating table, Canada will argue that its trade surplus with the U.S. is exaggerated by energy. StatsCan’s newest data don’t break down which goods were shipped to whichever country. But they do detail the types of goods that were exported and imported in aggregate, and we know that most of Canada’s energy exports go south of the border. Canada’s surplus in energy was $16.2 billion in the second quarter, even as it ran a goods-trade deficit of $5.2 billion. That means Canada’s trade advantage with the U.S. is flattered by shipments of oil and electricity,

To distract from the Trump’s administration’s obsession with headline trade figures, Canada might highlight trade in automobiles. Trump talks often about bringing car-and-truck production back to America. It will be difficult to argue that Canada is stealing those jobs. Canadian exports of motor vehicles and parts increased in the second quarter, but we still ran a sizeable deficit:

Glass half empty

There is more to trade than stuff.

International direct investment in Canada fell off a cliff in the second quarter, as non-Canadians fled the oil patch. Overall, foreign investment in Canada was a meagre $223 million in the second quarter, the lowest since 2010, according to StatsCan. Inward investment from merger and acquisitions plunged by $8.1 billion, the first decline since the first quarter of 2015.

Bottom line

In purely economic terms, the trade data are an overall positive for Canada. Stronger exports have been a long time coming, and should encourage those benefiting from healthier global demand to invest. The sharp drop in direct investment is a concern, although the decline is magnified by the decisions of a few big international oil companies to leave northern Alberta. But even a smaller trade surplus in goods with the U.S. will continue to attract the Trump administration’s attention. At the start of the NAFTA negotiations, Freeland emphasized that without energy, Canada’s trade with the U.S. has been balanced in recent years. Lighthizer was having none of it. He countered with a cumulative figure from the past decade that implies “balance” is a recent phenomenon. Recent history means little to the Trump administration. Its grievances are measured in the 23 years since NAFTA went into effect.

]]>How Bill Morneau found himself at war with small businesshttp://www.macleans.ca/opinion/how-bill-morneau-found-himself-at-war-with-small-business/
http://www.macleans.ca/opinion/how-bill-morneau-found-himself-at-war-with-small-business/#commentsWed, 30 Aug 2017 16:26:33 +0000http://www.macleans.ca/?p=1056347The finance minister's call for tax feedback unleashes vocal pushback from incensed lobbyists and political opponents

Canada’s mild-mannered finance minister tends to use social media to document his public schedule (Aug. 18: “Proud to speak at tonight’s @epilepsytoronto Soiree. A fun night in support of a great cause.”) or to congratulate colleagues (Aug. 28: Way to go @GPTaylorMRD! It has been amazing having you on team Finance and I can’t wait to see what you accomplish as Minister of Health!).

But earlier this week, before feting Ginette Petitpas Taylor’s promotion, Morneau unleashed a tweet-storm unlike anything the followers of @Bill_Morneau had ever seen. At about midday Ottawa time on Monday, the finance minister’s account exploded with an eight-point response to the increasingly hysterical opponents of his bid to curb aggressive tax planning.

“The rules are designed to help businesses grow — not shelter personal income from tax,” Morneau said in tweet No. 1. “Canadians deserve #TaxFairness.”

To review, back on July 18, Morneau said he was considering closing three tax “loopholes” available to smaller companies, but closed to the rest of us. It was probably the first time that most salaried Canadians heard about “income sprinkling,” a perfectly legal scheme that allows owners of a business to allocate income to family members, and thus reducing his or her tax bill. The tax code also permits the owners of a corporation, however small, to use his or her company to shelter income from passive investments, and to convert surplus revenue into capital gains, which are taxed at lower rates than income.

None of these things jibe with Prime Minister Justin Trudeau’s idea of a just society. But Morneau resisted acting unilaterally. He said he would listen to suggestions for 75 days, implying a deadline of Oct. 2. That means the government could still change its mind and decide there is a societal benefit to allowing an incorporated consultant to dodge taxes by shifting some of his or her income to his or her teenaged children.

It took some time, but the small-business lobby has decided to go to war over the proposed changes. The Canadian Federation of Independent Business is on its way to dislodging the Dairy Farmers of Canada as the leading champion of special-interest entitlement. “What has upset business owners more than anything are the comparisons made between the income of small business owners and that of employees,” Dan Kelly, the federation’s president, said in an op-ed published at the Huffington Post on Aug. 25. Elsewhere, Conservatives are calling Morneau’s proposals a “tax grab,” and doctors are warning of diminished health care. An engineer named Bonnie Swift says the proposals are “sexist” because they will make it harder for women entrepreneurs to have families.

Absent from the backlash is any suggestion of how the government might otherwise achieve its goal of erasing some of the more egregious examples of privilege from federal policy. Also missing is any recognition that the tax system should be as neutral as possible. The decision to start a company should be made on the merits of the enterprise, not whether there are financial gains to be had by gaming the tax code. Third, a lot of the criticism relies on sentiment, which is poor way to make policy. The small-business lobby wants us to separate risk-taking entrepreneurs from the salaried class. But as Andrew Coyne argued recently in the National Post, the barista who pulls shots while studying for his or her PhD is no less a risk-taker than the one who decides to open his or her own coffee shop. The entrepreneur already benefits from a significantly lower rate of taxation than larger companies pay. That’s advantage enough.

Still, there must be some unease in Ottawa. Morneau’s sudden Twitter flurry suggests the Trudeau government is worried that it is losing a winnable debate. That’s because it forgot that the easiest way to take something away from someone is to offer something else in return.

Coyne noted that Morneau did little to address the root of the problem, which is the wide gap between the small-business tax rate and individual rates. Narrow that gap, and there would be a lot less dodging. If that’s too much, cut the tax paid by fast-growing companies, which are the ones outfits such as the International Monetary Fund say are deserving of special treatment. An offer of that sort would make it more difficult to say the Trudeau government only is looking to raise more money.

Morneau’s tweet barrage included some sweeteners. He stressed that his policy suggestions wouldn’t increase taxes, and he appeared to give a guarantee that entrepreneurs would continue to receive special treatment. “We have the lowest #smallbiz tax in the #G7 and we’re keeping it that way,” Morneau wrote. He also said the any family member who did legitimate work for the company would be unaffected, as would companies that use their profits to invest in equipment, research and additional employees.

That should be enough. But to the apparent surprise of the Trudeau government, and, frankly, to some of us who pay attention to these things, the opposition and the business lobby have decided to take a stand over a business owner’s right to squeeze as much as he or she can from the tax system. Everyone loves the idea of fighting income inequality. But Morneau is discovering that many of the people he’s marked as lucky enough to be able to give back don’t consider themselves so fortunate. It probably won’t be a fight he can win on Twitter.

]]>http://www.macleans.ca/opinion/how-bill-morneau-found-himself-at-war-with-small-business/feed/15Why inequality is troubling the world’s top economistshttp://www.macleans.ca/economy/inequality-troubling-the-worlds-top-economists/
http://www.macleans.ca/economy/inequality-troubling-the-worlds-top-economists/#commentsTue, 29 Aug 2017 12:47:49 +0000http://www.macleans.ca/?p=1056067When Nobel Prize-winning economists gathered together this year, one big issue was on their minds

Every three years, all Nobel Prize winners in economics are invited to gather in the tranquil setting of the German island of Lindau to meet a selection of bright young economists and discuss the state of their profession. But this year such tranquility was challenged by worrying political developments across the globe. Perhaps unexpectedly, one of the central themes of the meeting became what to do about inequality.

While not all laureates would go as far as Jean Tirole, the 2014 Nobel Prize winner, who said that economic inequality itself is a form of “market failure”, it is clear that the political and social effects of growing inequality are drawing increasing attention from those at the top of the economics profession.

In a panel discussion on inequality, James Heckman, the 2000 Nobel laureate, pointed out that inequality had grown faster in the US and the UK than other Western democracies. Heckman said that changes to the tax system that favoured the rich had to be a key part of the explanation. He was also worried about the decline in social mobility, particularly for those on low pay.

Heckman also pointed out that the low income of many single-parent families, whose numbers have increasedsharply over the last few decades, had also increased inequality. He argued strongly for wage subsidies to boost the income of the working poor, and increased subsidies for childcare to help more single parents enter the labour market.

Towards a Universal Basic Income

Peter Diamond and Sir Christopher Pissarides, who shared the Nobel Prize in 2010 for their work on labour markets, both told me that they now favoured a universal basic income (UBI), which would give a minimum basic income to all citizens regardless of their economic status. Pissarides argued that the rapid spread of robots and AI is a threat to large numbers of less-skilled jobs. Without some government intervention, this will widen inequality, he believes. He would support UBI as long as it was carefully calibrated to be below the minimum wage to avoid disrupting the labour market.

Diamond told me that the growing inequality in the US was now as issue that had to be faced. In a recent paper, he demonstrated just how much the US was an outlier across a wide range of measures of inequality, including income, wealth, poverty and social mobility.

Diamond believes that the debate on inequality can help focus discussion on policy failures: from the lack of investment in education, research and infrastructure, to the failure to compensate those who bore the cost of globalisation through job losses in heavy industry. He also argues that direct transfers, including introducing child benefit to everyone who has children and a UBI, would help tackle poverty. While he does not think that the goal of policy should necessarily be focused on redistributing wealth, he believes that the economic challenges in the US require a higher level of government spending, and therefore higher taxation on the better off.

Both Diamond and Pissarides are prepared to consider higher taxes on wealth as part of the policy mix. Focusing on the US, Diamond favours a substantial increase in inheritance tax. From a UK perspective, Pissarides argues for some increased taxation of housing. He is in favour of taxing the capital gains from the sales of houses, rather than (at present) only taxing housing when it is inherited. He believes this could also have a beneficial effect on house prices, which are becoming unaffordable for many young people.

The paradox of global inequality

While much of the meeting focused on inequality in rich countries, the question of inequality in developing countries was not ignored. Eric Maskin, the 2007 Nobel laureate for his work on mechanism design, pointed out the paradox that while global inequality between countries was narrowing, due to the rapid economic growth of China and India, it was “deeply troubling” that inequality within developing countries was increasing.

Maskin suggested that this was in contradiction to the widely held economics theory of comparative advantage. This is the idea, put forward by economist David Ricardo in the 19th century, that the wages of unskilled workers in poorer countries rise as they enter global markets. Maskin suggested that this no longer holds as we now have an integrated global labour market – not a national one – with global supply chains and communications networks enabling companies to ignore national boundaries.

One of the purposes of the Lindau meeting is to encourage younger economists to think radically about what new areas of research they should focus on. It may be that these discussions will inspire the next generation to develop new policies to tackle the challenge of poverty and inequality.

Economics has often been characterised as the “dismal science” for its failure to engage with real-life issues or prevent crises like the 2008-09 global financial crisis. If this new approach takes hold, this could radically change.

]]>http://www.macleans.ca/economy/inequality-troubling-the-worlds-top-economists/feed/5Ten top RRSP questions answeredhttp://www.macleans.ca/economy/ten-top-rrsp-questions-answered/
Sun, 19 Feb 2017 16:58:58 +0000http://www.macleans.ca/?p=985317Are RRSPs a good idea? What are the differences between RRSPs and TFSAs? A MoneySense expert answers all

It’s that time of year again. RRSP season is upon us and before that March 1 deadline approaches, plenty of Canadians have questions about contributions, withdrawals and do’s and don’ts. Luckily, our experts have answered a lot of RRSP queries over the years. Are they a total waste of time? What happens if you over-contribute? How much money should you have in your account? Our friends at MoneySense have some answers.

Q: Are RRSPs ever a waste of time?

A: So, you have a Defined Benefit pension and don’t think RRSPs are worth your time? Depending on the situation (like if your spouse is out of work, or if they are in a lower tax bracket than you), contributing to an RRSP might be a great idea even if you have enough retirement savings. Here’s why.

Q: What are the differences between RRSPs and TFSAs?

A: The biggest differences are contribution limits, and how your money gets taxed upon withdrawal from the accounts. RRSP contributions are tax-deductible, whereas TFSA withdrawals are tax-free. Here are 6 more differences to know.

Q: How much should I have in my RRSP?

A: In your 20s, contributing shouldn’t be a priority but by age 35, you would have to start putting $10,500 a year into your RRSPs to reach a reasonable retirement goal of $500,000. You’ll have to adjust based on how much you’ll need in your golden years, of course. Here are the numbers by ages.

Q: Does it ever make sense to not contribute to your RRSP?

A: Yes. When you’re low-income, it might be best not to contribute to your RRSP. Here’s why.

Q: Would combining RRSP accounts save you money?

A: Combining RRSP accounts might save you in investing fees, but it might not be worth it. Here’s why.

Q: How does a mortgage inside an RRSP work?

A: Setting up a mortgage inside an RRSP requires a lot of work with low return. It has to be insured by the CMHC and you also need to charge commercial interest rates so your returns will be limited to 3-4%.

WINNIPEG – Smokers and banks will pay more to help pay for Manitoba’s spending on infrastructure in a deficit budget that borrows heavily from a dwindling rainy-day fund.

The governing NDP has tabled a $15-billion budget that boosts tobacco taxes by $1 a carton and increases the capital tax on financial institutions to six per cent from five per cent.

The budget — which includes a $422-million deficit — also increases tax credits for the caregivers of vulnerable relatives at home and boosts rental assistance for welfare recipients by up to $271 a household.

“We made a decision to invest in infrastructure. We made a decision to invest in health care. We made a decision to invest in education,” Finance Minister Greg Dewar said Thursday.

“Other provinces have taken a different route.”

The budget draws $105 million from Manitoba’s rainy-day fund to pay down debt and support infrastructure spending. That leaves $115 million in a bank account that boasted $864 million in 2009.

That will be replenished at some point “as the economy grows,” said Dewar, a longtime backbencher who took over the portfolio last fall after a partial caucus revolt against Premier Greg Selinger.

The fiscal blueprint promises $1 billion in infrastructure spending as part of a five-year stimulus plan that was announced when the government raised the provincial sales tax in 2013.

The budget includes modest spending increases in health care and education. It records the latest in a string of deficits as the province delays balancing the books until 2019 — four years later than originally promised.

Dewar disagreed with Statistics Canada’s assessment that Manitoba’s economy grew by 1.1 per cent last year, saying the province is “on track to have the strongest economy in Canada.”

But that’s not enough to balance the books in the near future, he said.

“We’re starting to see good numbers now and we’re anticipating that we shall return to surplus as long as we continue to spend less than we do coming in.”

The government has come under harsh criticism from the Progressive Conservatives for hiking taxes and not focusing aggressively enough on belt-tightening.

Thursday’s budget comes as the NDP tries to leave behind the turmoil caused by internal discontent that led to a leadership race in March which Selinger won by 33 votes. The premier’s top five cabinet ministers resigned last year after calling for his resignation in light of plummeting opinion polls following the provincial sales tax increase.

A few highlights from Manitoba’s budget:

— Tobacco taxes going up by $1 a carton.

— Corporation capital tax on banks and other financial institutions rises to 6 per cent from 5 per cent.

]]>Finance to do away with GST, HST on hospital parking for patients, visitorshttp://www.macleans.ca/news/canada/finance-to-do-away-with-gst-hst-on-hospital-parking-for-patients-visitors/
http://www.macleans.ca/news/canada/finance-to-do-away-with-gst-hst-on-hospital-parking-for-patients-visitors/#commentsFri, 24 Jan 2014 22:03:33 +0000http://www2.macleans.ca/?p=457647OTTAWA – Hospital patients and visitors are getting some relief on the cost of parking, courtesy of the same federal government that unceremoniously closed a loophole last year forcing them…

]]>OTTAWA – Hospital patients and visitors are getting some relief on the cost of parking, courtesy of the same federal government that unceremoniously closed a loophole last year forcing them to pay taxes on the fees.

The government announced the plan to stop charging GST or HST on hospital parking on Friday, less than a year after ending a tax break on fees at public institutions where the parking lot was run by a non-profit partner.

Hospitals had complained that they would have to absorb the tax, resulting in reduced parking revenues that they use to supplement their annual health care budgets.

Shortly after the measure was introduced in the 2013 budget, the government said the change was intended to ensure consistent tax treatment.

“These are companies that are supplying parking to hospitals and they were getting a special tax reduction,” then-junior finance minister Ted Menzies told the Commons last March.

“We do not think that is necessary.”

But the Finance Department is now proposing to soften part of that measure to exempt hospital parking fees from the GST or HST.

The Opposition New Democrats denounced the move as hypocritical, accusing the governing Conservatives of making tax policy “by the seat of their pants.”

“A year later the Conservatives have realized that it is taxing sick Canadians which is unnecessary, and isn’t going to win them any votes,” the party said in a statement.

“It took (Finance Minister Jim Flaherty) less than a year to realize this policy was unfair.”

In a statement Friday, Flaherty said he expected hospitals to pass on the tax savings by reducing the cost of hospital parking. But a number of hospitals were hoping the government would reverse its decision and had not yet factored the tax into their own budgets.

A charitable foundation set up by the Children’s Hospital of Eastern Ontario in Ottawa generates about $1.8 million annually that goes directly into the overall patient care budget.

Adding the HST meant the foundation would have had to collect up to an additional $234,000 from hospital patients and visitors, or hold parking rates steady and absorb the loss.

No tax was ever levied.

“We’ve been holding off doing that because we knew the government was reconsidering that direction in the budget,” said Alex Munter, the hospital’s president and CEO.

“So we’re very pleased that the government listened to the concerns from hospitals.”

Other institutions affected by last year’s tax loophole change, however, remain on the hook for parking taxes.

The Harper government said it would keep amendments in place to eliminate the tax exemption for parking provided by a charity set up or used by a municipality, university, public college or school.

The department is accepting public comments on the proposal until Feb. 24.

]]>http://www.macleans.ca/news/canada/finance-to-do-away-with-gst-hst-on-hospital-parking-for-patients-visitors/feed/9There is an iPod tax after allhttp://www.macleans.ca/economy/economicanalysis/there-is-an-ipod-tax-after-all/
http://www.macleans.ca/economy/economicanalysis/there-is-an-ipod-tax-after-all/#commentsTue, 21 Jan 2014 00:56:10 +0000http://www2.macleans.ca/?p=456412A CBSA lawyer warned the government was 'perpetuating a fraud' with its denial

]]>On the afternoon of April 4th, 2013 I published an article (no longer available online) at the Globe and Mail detailing how changes to the 2013 Budget created an iPod tax, placing a tariff on MP3 players manufactured in China where one did not exist before. Minister Flaherty’s office, the Finance Department and the Conservative Party would all claim that these items could come in tariff free using a provision in the tariff code, 9948.00.00 (9948), which allows for the duty-free importation of computer equipment through the use of end-use certificates, where the “end user” of the item could attest that they would use the item as a computer part. Documents obtained this weekend through the access to information act reveal that these arguments were being made despite the vehement objections of the Canada Border Services Agency (CBSA), the agency that enforces tariff regulations. One CBSA official went as far as describing the government’s 9948 argument as “perpetuating a fraud”.

At 5:19 PM, a few hours after my original piece was published, Andrew MacDougall, the then Prime Minister’s Director of Communications was kind enough to send me an e-mail detailing Finance’s position:

As an FYI, Finance officials say that iPods are exempt under this tariff classification:

Since the iPod plugs into a computer, Finance says, it falls under the following exemption:

“Only goods that were committed by design to enhance the functioning of computers and other high-tech products cited in tariff item 9948.00.00 were afforded customs duty-free importation under this tariff item.”

A few minutes later Conservative MP Michelle Rempel made a similar argument on CBC’sPower and Politics. Later that evening, Kathleen Perchaluk, Press Secretary to the Minister of the Office of the Minister of Finance issued the following press release:

Subject: NO IPOD TAX

Hi,

I am sure you have heard some rumblings today about a potential Ipod tax. I want to clarify that there is no ipod tax. Please feel free to pass this information along to your colleagues.

“The NDP are alleging that changes to the General Preferential Tariff – which removes preferential access to our marketplace to countries like China – is similar to the iPod tax proposed by the NDP. This is absolutely false.

The Globe and Mail responded to the press release by first pulling the iPod article, then replacing it with a statement that read:

An article published earlier at this URL incorrectly stated that the recent Canadian federal budget imposes a tax on iPods. That article was incorrect and has been withdrawn.

Documents obtained from the CBSA through Access to Information show that the CBSA, the agency responsible for enforcing the tariff code, strongly disagreed with Minister Flaherty’s office. The next day, Anne Kline, Director General of the Trade Programs Directorate would write:

As per the telephone conversation that I had with Ken and the PO nearly an hour ago, Mr. Moffat is actually quite bang-on in his interpretation of the tariff provisions.

Rod McKenzie, the Senior Program Advisor of the Tariff Policy Unit at the CBSA, would later write:

I think Mr. Moffatt really hit the nail on the head. His analysis is practically flawless.

The documents contain an e-mail at 8:11PM on April 4th from Ms. Kline to Patrick Halley, the Senior Chief of Tariff and Trade at Finance Canada, showing the CBSA had issues with Finance’s statement that MP3 players were being brought into the country tariff free using the 9948 provision.

We know that SOME iPods (and other MP3 players) have been imported (albeit incorrectly) under the duty-free provisions TI 9948.00.00. It is also very likely that some iPods and other MP3 players have been imported duty free by virtue of having been manufactured in a GPT country. And others still may have been duty-paid at the applicable MFN rate…

That said, I already feel quite confident that it cannot be purported that ALL iPods are being imported duty-free under the provisions of TI 9948.00.00, as that is really unlikely.

If someone from your department is actually making that statement, you might want to correct that misinterpretation.

Byron Fitzgerald, Manager of the Litigation Section of the CBSA would later characterize the argument made by Finance and the Conservative Party that iPods could come into the country tariff free under 9948 using end use certificates as “perpetuating a fraud”:

from my perspective the message should be that if the end user doesnt have it joined to a computer it dont qualify. Just like the tv issue. And suggesting end use certificates is perpetuating a fraud because the vast majority of folks don’t use them with computers.

Its up to finance to clarify 9948. This might be the catalyst forcing them to do so.

The next day, Doré Charbonneau, then Manager of the Beyond the Border Communications Team at the CBSA would e-mail her colleagues a draft version of a media response:

The CBSA would like to clarify the tariff classifications for iPods as well as other electronics:

It’s important to clarify that iPods do not qualify for the provisions of tariff item (TI) 9948.00.00. In order for goods to qualify for importation under TI 9948.00, they must be for use in computers and enhance the functions of the computer. Further, the actual user of the goods must certify that they are being used in a computer. [Emphasis in the original e-mail]

To my knowledge a final version of this media release was never issued to the public.

The Globe and Mail asked me to write a replacement article with my findings on the iPod tax issue, with the Globe‘s public editor weighing in the next week. Ms. Kline would express her displeasure at the replacement article:

It is really unfortunate that he [Moffatt] has been led to believe that the Agency is somehow interpreting things differently and is dismissing jurisprudence arising from a case that upheld the CBSA’s position!

An hour later, she would add:

I remain concerned that readers are being led to believe that TI 9948.00.00 applies and it really does not.

This episode should raise a number of red flags. Why was Minister Flaherty’s office, the Department of Finance and the Conservative Party claiming that the 9948 provision applied over the objections of the CBSA, the agency tasked with enforcing tariff regulations? Furthermore, how are businesses supposed to comply with tax and tariff regulations, when different arms of the government cannot agree on what the rules are?

]]>http://www.macleans.ca/economy/economicanalysis/there-is-an-ipod-tax-after-all/feed/55Budget surplus could be bigger than forecast in 2015, Flaherty tells CTVhttp://www.macleans.ca/news/canada/budget-surplus-could-be-bigger-than-forecast-in-2015-flaherty-tells-ctv/
http://www.macleans.ca/news/canada/budget-surplus-could-be-bigger-than-forecast-in-2015-flaherty-tells-ctv/#commentsSun, 05 Jan 2014 17:46:34 +0000http://www2.macleans.ca/?p=452276OTTAWA – The federal budget surplus could be bigger than predicted in 2015, Finance Minister Jim Flaherty said in an interview aired Sunday.
The assessment falls in line with projections…

]]>OTTAWA – The federal budget surplus could be bigger than predicted in 2015, Finance Minister Jim Flaherty said in an interview aired Sunday.

The assessment falls in line with projections from the parliamentary budget office that came a month ago.

A Dec. 5 report from the PBO estimated the government could achieve a surplus of $4.6 billion by 2015, nearly $1 billion more than the estimate included in the November economic update.

In an interview with CTV’s Question Period, Flaherty said Canada could have a bigger surplus than projected if both the domestic and U.S. economies continue to gain strength.

“We could have a larger surplus than we anticipate, but we will have a surplus,” said Flaherty.

The Harper Conservatives are relying on balancing the books to help propel the party through a federal election campaign that’s scheduled for the fall of 2015.

The PBO report, however, prefaced its surplus projections on expectations that the government would maintain EI premiums at current levels, that there would be no delays in selling off some public assets and that spending restraints would continue.

And that is exactly what the government expects to do, said Flaherty.

The government has frozen basic EI premium rates at $1.88 for every $100 earned until 2016.

As well, it has announced the sell off of some assets, including the Ridley Terminals and Dominion Coal Blocks in British Columbia and the government’s remaining stock of General Motors shares.

Flaherty said the government would also continue cutting spending to eliminate the budget deficit in time for the 2015-16 fiscal year.

“We’re controlling our own departmental spending,” the minister said, adding that his government will not reduce transfers to the provinces or cut programs or benefits.

Flaherty also backed away from recent concerns over the levels of personal debt held by Canadians, telling CTV that moves to shore up mortgage rules have kept housing debt loads in check.

“The (housing) market is calming somewhat, so I’m less concerned than I was,” he said.

“And when you look at debt to net worth, as long as the housing market remains relatively strong, we don’t really have a debt issue.”

However, Flaherty maintained that he would intervene to further tighten mortgage rules if the market needed further cooling.

]]>http://www.macleans.ca/news/canada/budget-surplus-could-be-bigger-than-forecast-in-2015-flaherty-tells-ctv/feed/8Alberta says tiffs over securities regulator could lead to more fractured systemhttp://www.macleans.ca/general/alberta-says-tiffs-over-securities-regulator-could-lead-to-more-fractured-system/
http://www.macleans.ca/general/alberta-says-tiffs-over-securities-regulator-could-lead-to-more-fractured-system/#commentsTue, 17 Dec 2013 22:18:39 +0000http://www2.macleans.ca/?p=449652OTTAWA – Bickering over a national securities regulator could lead to even greater dysfunction — the very problem Ottawa is aiming to resolve — if the two opposing camps don’t…

]]>OTTAWA – Bickering over a national securities regulator could lead to even greater dysfunction — the very problem Ottawa is aiming to resolve — if the two opposing camps don’t find common ground, Alberta Finance Minister Doug Horner says.

Currently, only Ontario and British Columbia have agreed to set up a co-operative approach as a first step toward establishing a national securities regulator, although some of the smaller provinces are believed to be ready to join.

But several provinces, particularly Quebec and Alberta, continue to insist they will not opt in to the federal initiative as currently proposed by Finance Minister Jim Flaherty. Instead, they are attempting to improve the current passport system to address some of the federal concerns.

On Tuesday, Quebec announced it will launch a reference case in the province’s court of appeal to block the federal bill when it is tabled. If it is successful it would be the second time Flaherty’s project has been stalled by court action.

“Regulating securities is a provincial jurisdiction that Quebec has always defended,” said Finance Minister Nicolas Marceau. “The system we have does well the job of protecting investors and developing the economy.”

Provincial ministers met on the issue in Ottawa on Tuesday with Horner, the chairman, saying the best approach is for a compromise that will satisfy both camps.

“Our worry is that they are going to proceed without consultations, without the next two largest markets — Alberta and Quebec — and you are going to end up with an even more fractured system at the end of the day,” he said in an interview.

“It’s far better for everyone concerned that we are all on the same page.”

Horner said the so-called “passport” provinces will present Ottawa and Ontario with a proposal for melding the two systems that respects federal concerns about systemic risk and policing, as well as provincial jurisdiction in day-to-day affairs of the regulatory process.

Flaherty has long argued that a national securities regulator operating under one set of laws is necessary to reduce costs, improve oversight and policing of financial markets, and reduce red tape. He has been supported in his six-year battle by most business lobby groups as well as global institutions, including the World Bank and the International Monetary Fund.

But in 2011, the Supreme Court ruled proposed federal legislation on the issue stepped on provincial jurisdiction. The court did recognize, however, that Ottawa had jurisdiction to guard against systemic risk in the financial markets.

In September, Flaherty, Ontario and B.C. took the first step toward a national system by announcing a “co-operative” regulator headquartered in Toronto that could administer a single set of rules.

Speaking for the opting out provinces, who say the current passport system of co-operation between the provinces works just fine, Horner said the federal government needs to “take a pause” and begin consultations.

]]>http://www.macleans.ca/general/alberta-says-tiffs-over-securities-regulator-could-lead-to-more-fractured-system/feed/1Ottawa, provincial finance ministers set for showdown on CPP enrichmenthttp://www.macleans.ca/news/canada/ottawa-provincial-finance-ministers-set-for-showdown-on-cpp-enrichment/
http://www.macleans.ca/news/canada/ottawa-provincial-finance-ministers-set-for-showdown-on-cpp-enrichment/#commentsSat, 14 Dec 2013 19:41:38 +0000http://www2.macleans.ca/?p=449045OTTAWA – Finance ministers from across Canada are heading toward a showdown in the next two days on an issue they’ve kicked around for years — whether to boost the…

]]>OTTAWA – Finance ministers from across Canada are heading toward a showdown in the next two days on an issue they’ve kicked around for years — whether to boost the Canada Pension Plan to ensure seniors have adequate income for the rest of their lives.

The topic is on Monday’s agenda for the concluding session of a federal-provincial meeting that starts Sunday in Ottawa, but it will be hard to keep the issue from spoiling someone’s supper at the opening dinner.

There’s been hardly any other topic mentioned leading into the sessions, with proponents and detractors issuing polling results that back their view. Ontario — along with Prince Edward Island, the main backer of CPP enhancement — is threatening to go it alone if federal Finance Minister Jim Flaherty does not come aboard.

Many believe the Ontario minister, Charles Sousa, is bluffing but he stuck to his guns in an interview with The Canadian Press.

“We have the critical mass in Ontario, there’s folks interested in providing those made-in-Ontario opportunities as an offset to CPP if it doesn’t come forward, so I’ll look at them seriously,” he said.

Most observers — including the idea’s staunchest critic, Dan Kelly of the Canadian Federation of Independent Business — say momentum is with the advocates of enhancement. Most proposals call for roughly a doubling of maximum annual CPP benefit above the current $12,150, which of course would mean doubling premiums that are split equally between workers and employers.

Kelly has been arguing — and some governments have taken up the call — that any premium increase from the current 9.9 per cent of pensionable earnings is a job killer, for the simple reason that if it costs firms more to hire workers, some will choose not to.

By Kelly’s count, the pro-enhancement provinces include Ontario, Manitoba, Newfoundland and Labrador, and P.E.I.

British Columbia, Alberta, Saskatchewan and Nova Scotia are “lukewarm,” with New Brunswick undecided. Quebec, which has a vote even though the province operates its own pension plan, appeared to signal Friday it would join the Yes camp if only to keep premiums in the rest of Canada in line with its own.

The federal position has vacillated between “now is not a good time,” to “CPP premiums are a job-discouraging payroll tax.”

For approval, any enhancement would need seven provinces representing two-thirds of the population, so at present the Yes camp is likely at least two provinces short.

Still, Kelly acknowledges he’s worried about Monday’s outcome.

“The piece that’s causing us to take this seriously is that the other provinces are not saying, ‘No, not ever,’ they’re saying, ‘No, not now.’ The view of small business is that we don’t believe this is a good measure ever,” said Kelly.

Sousa, and P.E.I. Finance Minister Wes Sheridan, who has tabled a specific proposal that would begin in two years and be phased in over the following three, believe the time has come to move ahead.

The idea was shelved in 2010 because it was felt the economy, just one year removed from a deep recession, was too fragile to withstand even a modest increase in payroll taxes. But with the recovery well underway and with a long phase-in period, the excuse rings hollow, proponents say.

To make the medicine go down more smoothly, Sousa said the proponents are willing to agree to conditions that the economy must be performing at a specified level of strength before CPP enhancement can proceed. As well, he won’t ask ministers to vote on a specific plan, only to agree in principle to go ahead when conditions are met.

“The question isn’t how much of a CPP we need to do — we’ll have to deliberate over that still,” he said.

“The question before us is, ‘Are the objectives of enhancement of CPP appropriate? And then do we put some thresholds to establish enhancement when times are good?’ And then when times are good, they are ready to go.”

Sousa said he believes that will be sufficient to carry the day Monday afternoon.

]]>http://www.macleans.ca/news/canada/ottawa-provincial-finance-ministers-set-for-showdown-on-cpp-enrichment/feed/23Quebec hoping to derail proposed national regulatorhttp://www.macleans.ca/news/canada/quebec-hoping-to-derail-proposed-national-regulator/
http://www.macleans.ca/news/canada/quebec-hoping-to-derail-proposed-national-regulator/#commentsMon, 23 Sep 2013 22:58:28 +0000http://www2.macleans.ca/?p=425899QUEBEC – Quebec is hoping to derail Ottawa proposal for a national securities regulator by coming up with improvements to the way Canada’s investment industry currently works.
Quebec Finance Minister…

]]>QUEBEC – Quebec is hoping to derail Ottawa proposal for a national securities regulator by coming up with improvements to the way Canada’s investment industry currently works.

Quebec Finance Minister Nicolas Marceau emerged from a meeting of provincial finance ministers in Quebec City on Monday to say there was agreement to improve the current ”passport” system.”

”All the provinces agreed to participate in these talks,” said Marceau, adding results are expected within a very tight deadline.

But asked in a later interview whether British Columbia would be part of that process, that province’s finance minister, Michael de Jong, said no.

De Jong said his province is clearly in favour of a proposed agreement announced last week by his province, Ontario and the federal government to proceed with a national body to oversee Canada’s investment industry.

They said they hoped to have the proposed ”co-operative regulator” in place by July 1, 2015.

Federal Finance Minister Jim Flaherty and Ontario, home to the Toronto Stock Exchange, have long sought a national securities regulator to replace the current patchwork of provincial and territorial bodies.

However, in 2011, the Supreme Court ruled Ottawa could not unilaterally create such a system because it intruded on provincial jurisdiction.

The Toronto-based regulator would administer a single set of regulations and be directed by a board of independent directors chosen by a federal-provincial council of ministers.

Marceau blasted the proposal last week and reiterated that opposition on Monday.

”It has never been shown, in any manner, that the current system in Canada is not working,” Marceau said. ”It has never been shown.

”This new system that is being proposed is not born yet and I don’t think it will be born, even eventually.”

Quebec’s position is in stark contrast with that of British Columbia, which describes the current system as ”cumbersome.”

De Jong refuted suggestions that Ottawa imposed last week’s proposed agreement on his province and Ontario.

He stressed the tripartite proposal fully respects provincial jurisdiction and that it contains safeguards to ensure that continues.

De Jong urged provinces to negotiate a co-operative agreement because the alternative would be unilateral federal legislation.

”And all of us will go out and hire constitutional lawyers and give them $5 million or $10 million.”

Ontario Finance Minister Charles Sousa attended Monday’s meeting but left early without speaking to the media.

A common securities regulator is overwhelmingly favoured by Canada’s business leaders and may be hard to resist if a model can be shown to work.

The Canadian Bankers Association and the Investment Funds Institute of Canada were among those who lauded the announcement.

Getting Alberta on board would all but assure the project’s success.

On Monday, Alberta Finance Minister Doug Horner said his province has an ”open mind” but that some elements in the proposed agreement just won’t fly as they currently stand.

”Some of the items in there, at this point in time, are not quite acceptable to Alberta, in terms of providing vetoes to the federal government or mitigating some of the expertise we have in Alberta in oil and gas,” he told reporters.

‘We are going to do due diligence on the agreement, but we’re going to continue to work with our partners in the passport system.”

]]>http://www.macleans.ca/news/canada/quebec-hoping-to-derail-proposed-national-regulator/feed/1The Bank of Canada’s move, and what it means for a fabled underground vaulthttp://www.macleans.ca/society/life/the-secret-treasure/
http://www.macleans.ca/society/life/the-secret-treasure/#commentsTue, 11 Jun 2013 10:00:00 +0000http://www2.macleans.ca/?p=391762As the BOC prepares for a massive relocation, rumours of its gold reserves still swirl

The Sept. 3, 1964, issue of Town Topics, a weekly newspaper in Princeton, N.J., and still a going concern, contains one of the very few accounts you will ever read of how the managers of a bank plan to relocate operations. Helpfully entitled “How to move a bank,” the story goes into some detail, explaining that, over the coming Labour Day weekend, the Princeton Bank and Trust Company would move from 12 Nassau St. to 76 Nassau St., a distance of some three city blocks. “And moving a bank, as you might well guess, makes the job of moving from one house to another seem as nothing,” the reporter writes. “Particularly since there can’t be any carefree strolling down Nassau Street by bank employees carrying wads of bills and securities.”

In the case of the Princeton Bank and Trust Company, which in 1963 handled average daily deposits of more than $40 million, the task of planning the move fell to Cornelius Arnett, assistant treasurer: “One look at the bulk of his logistics folder is testimony enough of the almost split-second planning he has set up to get the bank, its goods and chattels and its 60-plus employees from here to there, all in the space of a long weekend,” the paper notes. Much of the heavy lifting would come in the form of 1,500 safe-deposit boxes, each fitted with steel doors and bronze hinges, with a collective weight of 40,000 lb.—cargo destined for a new vault manufactured by the Mosler Safe Co., the company responsible for building the vaults at Fort Knox.

Evidently, the move in Princeton went off without a hitch—the next edition of Town Topics ran a picture of Mr. and Mrs. Gregory Guroff, the first couple to open accounts at the new location. But for anyone who stumbles across it, the Town Topics article provides not a few insights into how the Bank of Canada is handling the logistical and security challenges associated with its relocation to temporary lodgings this year.

The move has been in the works for some time. The bank’s current headquarters, updated in the late 1970s when architect Arthur Erickson slipped the original 1938 neo-classical stone structure into a modern building complete with wings of polished glass, has descended into decrepitude and badly needs revamping. “It’s getting long in the tooth in a number of the mechanical and electrical systems that support the facility,” says Dale Fleck, chief architect of the bank’s relocation. Last September, the Bank of Canada signed a lease for almost 350,000 sq. feet of space—equivalent to 4½ standard soccer fields—at Plaza 234, an office tower on Laurier Avenue in downtown Ottawa that’s about a 10-minute walk from what has been the bank’s address since 1938: 234 Wellington St., spitting distance from Parliament Hill and, as it happens, the locus of some pretty thrilling Canadian history.

Unlike the folks in Princeton, the Bank of Canada doesn’t like to discuss the details of its move, which began recently with the removal of such precious Bank of Canada holdings as the massive, three-tonne Yap stone, which has been on display in an atrium inside its building since the 1970s. A peculiarly weighty form of currency from the South Pacific—“it’s not really pocket change—maybe the closest we could come to it is a hundred-dollar bill,” explains Raewyn Passmore, assistant curator of the National Currency Collection, part of the Bank of Canada—the Yap stone had to be hauled away by crane.

Neither was that the most intriguing cargo loaded up for shipment at the bank of late. Indeed, the move of the Bank of Canada, from giant Yap bucks to electronic transfers, captures the whole sweep of money’s changing nature, with much of the story told against the backdrop of shimmering gold.

The bank’s move is a sensitive undertaking involving 1,400 employees, the seamless operation of financial systems crucial to the Canadian economy—and the contents of a fabled vault, located under the Bank of Canada building, where, during the Second World War, vast stores of European gold bullion arrived for safekeeping from the Nazis. As a matter of policy, the Bank of Canada doesn’t talk about the contents of that vault, says chief of communications Jill Vardy, including whether it continues to hold any of that precious war gold.

The renovations, with a price tag of $460 million, and due to be finished by January 2017, will be so extensive as to require the bank to move the entire contents of its Wellington building, including the subterranean vault, which extends from below Wellington and, reportedly, out under the Sparks Street Mall—“built,” in the words of Queen’s University historian Duncan McDowall, “right into the Laurentian Shield.” It was here that, beginning in the years immediately preceding the Second World War, and up until 1945, the central banks of England, Belgium, the Netherlands, France, Norway and Poland stowed a good deal of their gold reserves—in total, some 2,586 tonnes of it, worth about $120 billion in today’s gold prices—spirited across the Atlantic by ship, lest it fall into German hands. In time, this transfer of gold, the largest financial transaction in history, even came to include personal gold accounts for European refugees, a highly unusual accommodation by a central bank.

The first of that European gold, in the form of 3,550 bars culled from Bank of England reserves, arrived in May 1939, in a convoy travelling alongside the Empress of Australia ocean liner, which happened to be carrying King George VI and Queen Elizabeth (later better known as the Queen Mum) for the couple’s famous pre-war royal visit to Canada. The rest of the British gold arrived under circumstances decidedly less posh: as cargo labelled “fish” in a military operation called, appropriately enough, Operation Fish.

Within a couple of years, that influx of European gold, most frequently delivered by warship to Halifax, then by train to Ottawa, had bank officials scrambling for space. In a 1997 report it commissioned, aimed at determining whether the bank ever unwittingly handled tainted Nazi gold (it very likely didn’t, that report concluded), McDowall, a Carleton University historian at the time, describes a scene from out of Raiders of the Lost Ark: “Plans were drawn up for special shelving to be added to the new vault. When one young bank employee first glimpsed the bank’s new vault in 1938, he had thought it was ‘as cavernous as Fort Knox.’ By mid-1939, he remembered that gold was, by necessity, being stacked on the floor to save space. Crawl spaces were left between the stacks to enable the bank’s auditors to verify that the stacks were all gold.”

The security measures taken during transport of this precious cargo may, some 70 years later, suggest how the Bank of Canada’s more recent relocation planning must have come together. The British gold, in particular, as Bank of England governor Montagu Norman warned Ottawa in one dispatch, reached the Canadian vault “by devious and unexpected ways.” Beginning in England, the gold-laden trucks left London for the docks at Portsmouth with little security, as officials believed that low-key secrecy would provide the best protection. One young Bank of Canada staffer, who told his story to the Ottawa Citizen decades later, described his bosses putting him on a stately private train bound for a secret destination—it turned out to be Quebec City—where he received sealed instructions. “Specially chartered trains brought the gold to Ottawa and the bank hired some Mounties to oversee its unloading,” McDowall writes of one shipment. After spotting this scene at the Ottawa train station, then located not far from Parliament Hill, reporters began asking questions, and went on to write, in McDowall’s word, “garbled” news dispatches.

Whether any of that Operation Fish gold remains in the vault is an open question. According to a spokesman, the bank continues to manage $68 billion in foreign reserves. “It’s possible that some of it still is washing around in there,” says McDowall, who received a guided tour of the subterranean facility after completing his report in 1997. “I’m no expert on vaults, but it seemed like a pretty secure place,” he says. “It’s like a library. Aesthetically, it’s quite striking because there’s row after row of gold bars. You could see that gold has a different lustre from the different nations of production. You could look down these rows and they would say, ‘Here’s the Polish gold,’ and most of it was of one colour. The South African gold, I think, was very lustrous, whereas the Russian gold was quite dull.”

Circumstances in the vault have changed since the mid-1990s. Canada spent the early part of the last decade aggressively divesting itself of its gold reserves, selling at the bottom of the market. Today its holdings amount to $141 million, according to the Bank of Canada, ranking us 85th on the World Gold Council’s list of countries by gold holdings, sandwiched between Mozambique and Slovenia.

But rude, corporeal stuff like gold isn’t what central banks are made of anymore. The most delicate aspect of the Bank of Canada’s upcoming move, says Michael King, a former analyst with the Bank of Canada who is now with the Richard Ivey School of Business, at the University of Western Ontario, will involve its role in the Large Value Transfer System, an electronic scheme that permits financial institutions and their customers to shuttle large payments among themselves, securely and in real time. “That is a vital system for the functioning of Canada’s financial system,” says King, a claim borne out by the numbers: In 2011, according to the Bank of Canada, the system processed some 26,000 payments a day, worth an average total of $157.5 billion.

To ensure the seamless functioning of this and other of its operations, the bank does extensive business-continuity planning, and in the event of a crisis—large-scale power outages, terrorist attacks, massive G20-style demonstrations—it is always in a position to operate out of several constantly maintained off-sites. “One of the priorities for the bank over the past few years is ensuring that we’ve got business-continuity plans in place and all of the arrangements to ensure that we can seamlessly deliver these critical systems and services,” says Vardy. “We’re sort of the federal government’s banker, as it were. All of the federal government’s debt transactions happen through here.” Moving into its new digs will largely be an extension of the bank’s already long-standing practices.

Yet the move has no doubt also involved the transport of less newfangled stuff. Former front-line employees interviewed by Maclean’s, whose work until recently took them beneath the Bank of Canada building, describe vaults that, although depleted, continue to be home to a not insignificant horde of foreign reserves—gold in the form of bullion and coins kept for other central banks. Whatever those holdings entail, all of it is already gone, relocated in advance of the move. That gold is a mere glimmer of the old days, when the earth under 234 Wellington St. was a nest of European bullion kept safe from the Nazis.

]]>http://www.macleans.ca/society/life/the-secret-treasure/feed/1Sleeping on it: Spanish company unveils mattresses with built-in safeshttp://www.macleans.ca/economy/business/sleeping-on-it/
http://www.macleans.ca/economy/business/sleeping-on-it/#commentsSat, 13 Apr 2013 00:00:00 +0000http://www2.macleans.ca/?p=370525“Your money is very close to you, and very far from the banks”

Taking a cue from paranoid hoarders, a Spanish mattress company thinks it has the cure for Europeans losing sleep over the economy’s ups and downs. Descanso Santos Sueños (DeSS) has released a line of mattresses with built-in safes, rationalizing that people might feel more secure storing savings in their beds than at the bank.

Called the Caja Mi Colchón, meaning “my mattress safe,” the product features a small keypad and deposit box hidden underneath a flap at the foot of the bed. Its launch coincided with a massive bailout in the EU nation of Cyprus that saw depositors in the country’s largest bank suffer major losses.

A dramatic commercial by DeSS imagines Spain in a similar crisis, with looters and rioters running wild in the streets. But one lucky man opens his Caja Mi Colchón to find his money safe and sound, and is so relieved that a tear reverses up his cheek back into his eyeball. The message, “Your money is very close to you, and very far from the banks,” then splashes across the screen, bolstering the ad’s not-so-subtle sell.

Paco Santos, president of DeSS, claims sales for the $1,140-mattress are exceeding expectations, though he has declined to give specific figures.

As the hometown of Penn State University, the municipality of State College, Penn., is no stranger to bad publicity. But its announcement last month that it was paying a Canadian bank $9 million as part of a failed plan to raise money to build a new school has placed the town at the centre of a national debate over a type of high-risk debt that critics claim has helped tip hundreds of American cities, schools and transit systems into financial ruin.

In 2006, State College’s school board planned to issue bonds to raise $58 million to replace its aging high school. The board’s financial adviser suggested it hire the Royal Bank of Canada to do the deal, and protect against the prospect of rising interest rates on its bonds by locking into a complex deal known as an interest-rate swap with the bank.

The school board would pay RBC a fixed interest rate and RBC would pay the board a floating rate, which the board would then use to pay its bond investors. If rates rose, the board would pocket the difference. If they fell, the school would owe the bank. But in a twist, the community voted not to build a school and the board never issued the bonds. After interest rates plunged in the wake of the 2008 financial crisis, the board missed its first interest payment of nearly $1 million to RBC. It launched a lawsuit to try and back out of the agreement but lost the court case and last month announced it had reached a settlement to pay RBC $9 million of a termination fee between $10 and $11 million.

“Obviously, no one is happy about the conclusion of this, and I think that’s entirely understandable,” says long-time State College director David Hutchison. “It’s money that’s not being spent on education.” RBC spokesman Kevin Foster said the deal was vindicated in court and the school board never attempted to renegotiate the agreement before the filing of the suit. “We were pleased to have reached a resolution with the district after their decision to sue us, rather than engage us in a business discussion that could have addressed this matter without the district incurring the cost of litigation,” Foster said in a statement.

State College’s debt fiasco is one that is playing out in municipalities across the U.S., as cities suffer from severe cases of buyer’s remorse after hastily getting into these agreements. Interest-rate swaps were big business before the financial crash. The Bank for International Settlements reports that by 2009 there were outstanding rate swaps on more than $340 trillion of global debt, making swaps the largest segment of the derivatives market.

Virtually every major Wall Street bank, from Goldman Sachs to J.P. Morgan, sold interest-rate swaps, with American municipalities among their largest clients. U.S. cities, hospitals and universities eagerly piled into an estimated $500 billion worth of swaps in the hope that the agreements would offer a quick fix to their chronic budget crises and pension shortfalls. When interest rates fell to historic lows, and the anticipated paydays never arrived, municipalities began looking for ways out, triggering billions in termination fees and a flurry of lawsuits.

RBC had built up one of the largest municipal financing and swap dealerships in the U.S. It wouldn’t comment on the size of its municipal swap business south of the border, although it has previously said it was the leader in municipal financing in Pennsylvania and Arizona and among the leaders in several other states.

A Pennsylvania auditor general’s report found the state capital, Harrisburg, had paid above-market rates for swap agreements with RBC as part of a deal to fund a new incinerator. The community tried unsuccessfully to file for bankruptcy protection in 2011 under the weight of more than $300 million in debt because of the failed incinerator project.

The College of Santa Fe, New Mexico’s oldest liberal arts college, collapsed in 2009, owing $25 million to RBC for a bond deal that included an interest-rate swap. The college, which had fewer than 600 students, was eventually bought out by the state and local government.

Banks heavily promoted municipal swap agreements in the lead-up to the financial crisis, since they could charge higher fees on the arrangements than in a typical municipal bond deal, says Andrew Kalotay, a quantitative analyst and debt-financing expert. Proponents of such deals argue that, had interest rates actually risen, municipalities would have benefited greatly at the expense of the banks. But Kalotay argues that local governments either didn’t understand, or simply ignored, the risks attached to them. He estimates American municipalities, which were not sophisticated financial clients but behaved as if they were, paid as much as $4 billion a year in swap fees.

Few municipalities have financing experts on staff, so they require an independent financial adviser to guide them through a deal. Kalotay says advisers were poorly regulated and hopelessly conflicted, since they only made money if the deals got done. One school board in Denver signed a “conflict waiver” so that RBC could act as its financial adviser on an exotic $750-million deal involving a swap, even though RBC was also participating in the deal.

In the case of State College, less than a year after the school district finalized the swap agreement, its financial adviser took a job with RBC. (RBC refused to comment on the hiring, but told the Wall Street Journalin 2011 that such a move “is not uncommon in the industry.”)

Since agreeing to the $9-million payout to RBC, directors at State College have called on state legislators to ban municipal interest-rate swaps, echoing an earlier call by the state’s auditor general. “They’re very complex and a lot of people on the board would not be aware of the intricacies of them,” says college director Hutchinson.

The board still needs to find a way to raise money to build a new school. When it does, Hutchinson expects it will be done with a long-term mortgage. In other words, the way such deals used to be done.

]]>http://www.macleans.ca/economy/business/a-schooling-in-america-2/feed/2Canadians missing fewer loan payments, paying off debts fasterhttp://www.macleans.ca/general/canadians-missing-fewer-loan-payments-paying-off-debts-faster/
http://www.macleans.ca/general/canadians-missing-fewer-loan-payments-paying-off-debts-faster/#commentsThu, 24 Jan 2013 16:00:18 +0000http://www2.macleans.ca/?p=341320TORONTO – Canadians are paying off their debts faster, with the number of those more than three months behind on loan payments dropping to a record low, according to a…

]]>TORONTO – Canadians are paying off their debts faster, with the number of those more than three months behind on loan payments dropping to a record low, according to a report Thursday from Equifax Canada.

The latest National Credits Trends study by the credit monitoring firm found that the percentage of unpaid non-mortgage debt past-due more than 90 days was 1.19 per cent in the fourth quarter of 2012, a slight decrease from 1.22 per cent in the third quarter.

Nadim Abdo, Equifax’s vice-president of consulting solutions, says these rates have been declining since the pre-recession level in 2007 when it was at 1.75 per cent.

“Part of it I would attribute to people looking after their credit and not taking on too much credit,” he said. “Credit has become very important for consumers in general. There is more awareness, I would say, then there was before.”

The study, which is released each quarter, also found that average credit card balances have dropped by 3.7 per cent compared with the July-September quarter — a sign that people may be trying to pay these off quicker than before.

Despite this, the study also saw an increase of 3.2 per cent on non-mortgage loans, including bank loans, lines of credit, car leases and credit cards in the October-December period, up from a 1.8 per cent increase in the previous quarter.

Equifax said that suggested that Canadian non-mortgage debt totalled $497.4 billion in the fourth quarter, up from $489 billion in the third quarter.

The firm says it found that fewer consumers applied for new loans in the latest quarter, but rather made do with the loans they already had.

And it found an 11 per cent decline in new credit applications, compared with pre-recession levels.

This shows that consumers are learning more control over their credit and debt levels, Abdo said.

“People are (being) financially responsible,” he said. “They have the facilities and they’re just using them, versus just going crazy and getting those 25 credit cards like we used to back in the heyday.”

Abdo also said he expected the drop in loan balances and loan defaults to continue if the economy remains stable.

In previous years, he says Equifax studies have shown that consumers tend to take out more loans, and do not pay them back as quickly, during a volatile economy or periods of high unemployment.

Meanwhile, the Bank of Canada on Tuesday downgraded its economic growth outlook for the country to 1.9 per cent for 2012 and to two per cent for 2013, both three-tenths of a point lower than previously forecast.

The central bank says as a result, interest rates will be kept lower for longer due to the weak economy.

As long as there have been banks, there have been banking scandals. The treasurers of Athena burned the Acropolis in an attempted cover-up after secretly lending money to speculative bankers. Wall Street’s first banking scandal—a familiar tale of banks lending too heavily to property speculators who lost it all when the real estate bubble burst—happened in 1837. Banking that breaks the rules “in consequence of some flattering speculation of extraordinary gain, is almost always extremely dangerous and frequently fatal to the banking company which attempts it,” economist Adam Smith warned in The Wealth of Nations nearly 250 years ago.

With that history, it’s understandable that economists don’t quite believe promises by U.K. regulators that the latest scandal to rock the global financial industry—revelations that banks were manipulating a key interest rate affecting more than $300 trillion in worldwide investments—will usher in a new era of ethical banking. “It’s guaranteed to be a losing battle,” says Richard Grossman, an economist at Wesleyan University and author of Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. “The incentives in banking are so strong and the money is so big. As soon as you close off one area, someone is going to think of a new way to do things.”

The recent LIBOR scandal centers on allegations that several banks falsely reported the rates they expected to pay to borrow money from other banks. (LIBOR stands for the London interbank offer rate.) It has provoked all the usual fallout from a major banking crisis: Barclays, the first bank to settle with U.S. and U.K. regulators, has paid roughly $460 million in fines. CEO Robert Diamond resigned, as did the bank’s Canadian COO, Jerry Del Missier, and its chairman, Marcus Agius. Diamond was hauled before a British parliamentary hearing where politicians read out incriminating emails involving traders congratulating themselves on their misdeeds with offers of expensive champagne, and accused Diamond, with his estimated $145 million in compensation, of personifying a culture of greed and running a “rotten, thieving bank.”

European Central Bank (ECB) president Mario Draghi blamed the scandal on a governance failure, suggesting such a major gaffe wouldn’t have happened on his watch. “I don’t know what the ECB would have done but I hope we would have done better,” he told a German press conference. U.K. regulators have begun rushing to close the loopholes that allowed banks to self-report their own cost of borrowing for years by introducing rules that would make it illegal for them to deliberately misstate their interest rates.

It’s a story we’ve heard before. After all, the 2008 financial crisis ushered in Dodd-Frank in the U.S. and Basel III in Europe. The laws, which meant to crack down on the riskiest activities in global finance by forcing banks to hold more capital and make their derivatives trading more transparent, were deemed the most sweeping regulatory changes since the Great Depression. Many observers at the time figured banking scandals would be behind us once and for all.

Hardly. There have been other supposed watershed moments since then, including the recent scandal involving JPMorgan Chase & Co., whose executives were grilled by a U.S. Senate committee over admissions the bank had lost at least $2 billion trading in risky credit derivatives. A resignation letter by former Goldman Sachs executive director Greg Smith, published in the New York Times in March, in which he complained of bankers referring to their clients as “Muppets,” was also touted as a wake-up call for an industry that seemed oblivious to the fact it had lost all credibility in the eyes of the public.

Finger pointing and piecemeal changes to the rules of banking aren’t nearly enough, says Ilana Singer, deputy director of investor- rights organization FAIR Canada. What’s needed is a change in the culture of banking through regulations that would make it illegal for financial institutions to profit off the misfortunes of their clients. “Banks and other financial firms are often looking out for their own interests and not for the interest of the client,” Singer says. “If there’s a view that regulations are not being enforced in a tough way, they won’t encourage a culture where there is fear of the regulations. It’s a culture of complacency.”

But more regulation and criminal sanctions aren’t likely to stop future financial crises or prompt bankers to suddenly adopt a new ethical code of conduct, says Tom Kirchmaier, a fellow at the London School of Economics’ Financial Markets Group. “We have to get away from this belief that everything needs to be regulated because if we believe that banks are not to be trusted, we need to nationalize them,” he says. “You can’t put a policeman behind every banker.”

Regulation has its limitations, says Grossman. For one, governments and the public have short memories when it comes to financial crises. Regulations that seemed prudent in one era become the next generation’s “political red tape.” There were virtually no financial crises in the Western world from the 1930s to the 1970s. Not because bankers were somehow more ethical, Grossman says, but because restrictive regulations following the Great Depression made it difficult to profit handsomely from risky ventures. Then the economic downturn from the oil price shocks of the 1970s pushed governments to liberalize markets to help kick-start the economy by freeing up global capital.

Another school of thought gaining in popularity is that investment banking should take a page from the innovations in the manufacturing sector by getting rid of the legions of traders and salesmen who unlock hidden profits by dreaming up obscure new securities, and replacing them with more standardized financial products that are traded through electronic clearinghouses. In other words, fewer creative bankers, more reliable computers.

“Standardization of products and process automation will have to replace the tailor-made approach of many trading desks. IT investments in the range of billions [of dollars] will be necessary. The number of people on the trading floors will have to drop to levels currently seen at exchanges,” writes Hugo Banziger, the former chief risk officer at Deutsche Bank who also sits on the international Financial Stability Board, in a position paper published this summer. “Only by actively designing and implementing a new business model that delivers sustainable risk rewards in a transparent fashion, the financial industry will be able to regain acceptance.” His view may signal a shift in the industry, particularly since Banziger is rumoured to be on the list of potential successors to Diamond at Barclays.

Rather than adding more regulations, Kirchmaier says we need a wholesale shift away from a system built on trading in huge volumes of opaque financial products and a return to a simpler era when the duties of the banker were defined by the adage of three-six-three: borrow money from depositors at three per cent, lend it out at six per cent and hit the golf course by 3 p.m.

“It’s less about ethics than about what we want our banks to do and how to do it,” Kirchmaier says. “As a global society we have to ask ourselves: do we want to have fancy-schmancy banks who do all sorts of cool things that nobody understands? Or do we want to accept that there are limitations to what is possible?”

But an overhaul is easier said than done in an industry that has profited so handsomely from the growing size and complexity of its operations. “The short answer is probably no, we can’t trust the banks to regulate themselves,” says Grossman. “People and institutions react to incentives and there’s a lot of money to be made in financial sectors as long as that incentive is there.”

]]>http://www.macleans.ca/economy/business/banks-too-big-to-behave/feed/7The LIBOR scandal: It can’t just be bad appleshttp://www.macleans.ca/news/world/letter-from-europe-on-the-banks-of-denial/
http://www.macleans.ca/news/world/letter-from-europe-on-the-banks-of-denial/#commentsMon, 09 Jul 2012 18:51:01 +0000http://www2.macleans.ca/?p=271985Bad systems convince good people they are doing good even when they are clearly doing the opposite

Earlier this week, when American-born Barclays chief executive Bob Diamond finally stepped down in the wake of his bank’s interest-rate-rigging scandal, it was with characteristic defiance. “I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth,” he said. Not entirely surprising, given Diamond’s reputation for partisan toughness, though it’s interesting to wonder exactly which incongruous “truth” and “impression” he was referring to.

Here’s another truth: between the fall of 2007 and spring 2009, Barclays, one of Britain’s largest banks, found itself, like many other financial institutions, in dire straits. It was struggling to raise funds. Had it revealed it was paying higher-than-average interest rates, Barclays risked “reputational” damage and could have ended up being bailed out like the Royal Bank of Scotland or Lloyds Banking Group. Instead, its investment banking staff began subtly rigging the London interbank offered rate (LIBOR), an average interest rate estimated by the city’s leading banks of what they would be charged if borrowing from other banks. As the rate is calculated daily and underpins trillions of dollars of financial transactions, the habitual rigging had untold reverberations on the British economy as a whole. Last week, the scandal exploded as Barclays was fined $460 million by British and U.S. authorities for attempting to manipulate rates.

As for the impression? Here in the U.K., the Barclays scandal has been taken as a clear indication that the bank, and by extension the culture of finance in the city of London as a whole, is unacceptably corrupt. As governor of the Bank of England, Sir Mervyn King told media last week after yet another financial scandal came to light (this one involving improper selling of complex financial products to small businesses), “From excessive levels of compensation, to shoddy treatment of customers, to a deceitful manipulation of one of the most important interest rates, and now news of yet another mis-selling scandal, we can see we need a real change in the culture of the industry.”

It’s hard to understand how Diamond, whose resignation was applauded across the country and by the Chancellor of the Exchequer George Osborne as “the first step toward a new culture of responsibility in banking,” could possibly see his downfall as the result of false impressions. While it’s true the LIBOR investigation did not find him personally culpable, the buck must stop somewhere. On Monday, it appeared to have stopped with Barclays board chairman Marcus Agius, who tendered his own resignation. With Diamond’s departure on Tuesday, Agius is back and has taken over the running of the bank until a new chairman is appointed.

Diamond avoided the media after resigning, but both Diamond and Agius were called by the House treasury committee to be interrogated by MPs. In his resignation statement, Diamond—who never misses an opportunity to distance himself from the scandal—insisted he is looking forward to the opportunity to “contribute to the treasury committee’s enquiries related to the settlements that Barclays announced last week without my leadership in question.” Truth: I’m being forced to resign because the bank I was in charge of lied and cheated. Impression: actually, this whole thing hasn’t got much to do with me at all.

It’s exactly this attitude of moral impunity within the finance community that many British politicians and commentators are now insisting must be examined and redressed. While Prime Minister David Cameron has announced a swift and focused parliamentary inquiry into the LIBOR scandal, the Opposition are calling this solution a cop-out. Instead, Labour Leader Ed Miliband is demanding a full-scale public inquiry, like the one into media phone hacking, to uncover “institutional corruption” and to “find out what is going on in the dark corners of the banks.” This culture, Miliband has suggested, can only be rectified by the introduction of a stringent new code of conduct and criminal deterrents for bankers who break the rules.

But why is rule-breaking and number-fudging so rampant in the world of British high finance? The answer, a growing number of commentators are beginning to observe, cannot simply be a matter of “isolated rogue elements” at work in an essentially ethical corporation. Rather, the problem is institutional and systemic: bad systems convince good people they are doing good even when they are clearly doing the opposite. As the Irish finance journalist and author Fintan O’Toole recently wrote in the Observer, corrupt cultures “reward the compliant with tribal approbation and recast conscience as negativity. They invert altruism, using the instincts of decency . . . to normalize sociopathic behaviour and make decency despicable.”

Here in the U.K., the LIBOR rigging scandal at Barclays will have cultural and political consequences for many months to come. The BBC’s political editor Nick Robinson has said it is “to banking what the Milly Dowler case was to phone hacking.” But more than that, it stands as a warning to all corrupt systems in the country, financial, political or otherwise: fess up, clean up and learn to self-regulate or risk being disastrously exposed.

From the Maclean’s University Rankings. For more university advice, get your copy today!

Let’s face it: university is expensive. Between tuition, textbooks and having a social life, the cost adds up quickly. Luckily, smartphones can cut costs with a range of apps designed to manage money and track expenses. Forget bank tellers. Since the first mobile banking application became available in Canada in early 2010, the number of Canadians using daily mobile banking has climbed to more than 2.5 million, according to a July report by the Toronto-based Solutions Research Group.

Not surprisingly, the number of apps has also exploded. Here, in no particular order, are the top eight for saving money via your smartphone.

Standing in line at the bank is as exciting as a library tour. Luckily, Canada’s “Big Five”—the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal and Canadian Imperial Bank of Commerce—all offer a full suite of mobile apps for everyday banking transactions such as checking account balances, paying bills, and transferring money. Plus, you can use your bank’s ATM locator to avoid wallet-gouging fees from machines outside your bank’s network.

2. ATM Hunter

Cost: Free

Available for: iPhone, iPod Touch, Android, BlackBerry

Wallet-gouging ATM fees are unavoidable when it’s an emergency, you’re in a remote location, or you’re just plain lost. But ATM Hunter scouts out the nearest cash point from your bank’s own network, based on your current location. There’s even a map so you can grab cash and find your way home (or back to the bar).

3. Mint

Cost: Free

Available for: iPhone, iPod Touch, Android

To ensure you aren’t broke by Christmas, Mint’s account aggregation lets you track cash flow, bank balances, credit cards and student loans, as well as create a budget and set financial goals. Every transaction is logged and categorized so you see exactly what you’re spending each month and how; categories include spending on groceries, clothing and coffee shops (sorry, there’s no hiding your Starbucks addiction). Mint also alerts you to activity across your accounts, such as when your paycheque clears, when you’re low on cash or credit, or when you overspend in a particular category, so you’ll know exactly when you’re one latte from the brink.

4. BillMinder

Cost: $1.99

Available for: iPhone, iPod Touch, Android

Keeping track of bills can be annoying, but getting your water cut off mid-shower is worse. BillMinder allows you to track recurring bills and enable push notifications to make sure you (or your forgetful roommate) never miss a payment. It also manages bill collector contact information, separates paid and unpaid bills, and calculates the total amount owed for each month so you know how much money to set aside. For peace of mind, you can back up your data and export via email.

5. CheckPlease Lite Tip Calculator

Cost: Free, or $0.99 for the advertisement-free upgrade

Available for: iPhone, iPod Touch, Android

When dining (or drinking) with friends, CheckPlease answers the question that has bedevilled undergrads from time immemorial: “How much do I owe?” Simply input your total bill, the number of people in your party, and the percentage of your tip for fuss-free payment.

6. CardStar

Cost: Free

Available for: iPhone, iPod Touch, Android, BlackBerry

Discount and points cards are the unsung heroes in cash-strapped students’ wallets, but can become increasingly unmanageable (and bulky) as they accumulate. CardStar stores and organizes digital copies for quick retrieval, and also finds nearby stores based on your location. Bonus: it alerts you to coupons.

7. Economy Shopping Lite

Cost: Free, or $1.99 for the upgrade

Available for: iPhone, iPod Touch

This app replaces the diehard pen-and-paper shopping list, filtering items by category for convenience. Forgetful? The app automatically sorts your shopping list by the date of last purchase, so you’ll never accidentally sip sour milk or argue with your roommates over whose turn it is to buy toilet paper. Another feature: you can input price and the location where you purchased the item, so you’ll never forget where to find the cheapest food. Economy Shopping also composes a chart of your monthly grocery bill, so you can see where you could stand to cut back.

8. PayPal Mobile

Cost: Free

Available for: iPhone, iPod Touch, Android, BlackBerry

PayPal, the world’s largest free online payment provider, allows you to transfer funds on the go using three useful mobile features. The Bump feature lets you transfer money between two PayPal accounts by gently bumping two iPhones together. Like CheckPlease, the Split Check feature lets you divide the cost of a meal, including tax and tip, among up to 20 people, and allows for quick reimbursement. The Collect Money feature permits you to request money from multiple people for things like rent and bills.

]]>In March, the Harper government announced that it would return the federal books to balance in the 2015-2016 fiscal year. Seventeen days later, the Conservatives changed their minds and promised instead to return to balance in 2014-2015. Seven months to the day after that, the Harper government has decided it can’t fulfill April’s promise and is going back to March’s projection (at the earliest).

Depending on how you count these things, this is either the third or fifth return-to-balance projection the government has offered in the last three years (first 2013-2014, then 2014-2015, then 2015-2016, then back to 2014-2015 and now back to 2015-2016).

Including Mr. Harper’s vow in 2008 that a government led by him would “never” go into deficit, this is the second time in three years that the Conservatives have made a balanced-budget promise during an election campaign only to abandon it after being reelected.

More than 1,000 students at Brandon University have signed a petition asking for their tuition money back because of a faculty strike that caused classes to be cancelled since Oct. 12.

But the Brandon University Student’s Union (BUSU), which has collected the signatures, doesn’t blame the professors—who are striking for the second time in three years—for their three weeks of missed classes. BUSU supports the picketing profs. They agree they’re underpaid.

But are Brandon’s professors really underpaid? More importantly—are professors underpaid in general? It’s a question students and taxpayers should ask—they’re the ones who pay the bills.

After the latest round of talks between the the Brandon University Faculty Association (BUFA) and the adminitration broke down, the university’s President, Deborah Poff, released a statement. She argued that pension obligations ($3.1-million per year) and inflation will mean major budget cuts this year, even if faculty accept an offer. The higher that offer, the bigger the cuts for students.

Naturally, BUFA argued in a statement online that they think the university can afford to pay more. The union points out that they’re not asking for much of raise—and that much is true. Their latest offer to the university was for a 4.6 per cent increase over two years, plus an increase in the third year, as determined by an arbitrator. If inflation continues at the 3.5 per cent observed lately by the Consumer Price Index, the decline in the value of money will eat up all of the increases.

BUFA is technically asking for a raise, but what they’ll end up won’t feel like much of a raise.

On the surface, such a deal seems unfair to profs. Everyone deserves recognition for hard work.

Besides, professors are paid well—even at Brandon. The average salary of full-time university teachers (including all ranks) at Brandon is typical for its peer group—and much higher than what the average Canadian makes. Full-time teachers of all ranks averaged $89,829 at Brandon. The average salary of Canadians aged 25 to 54 is equivalent to $48,458, says Statistics Canada.

Even if you agree that professors should make more than the average Canadian (and I do—I’ll get to that), Brandon’s professors are paid well in comparison with their peers. True, they make less than the national average ($106,174) for professors, but Brandon, Man. is a tiny city (pop. 48,256), where things cost less. The average value of a home in Brandon was a piddly $152,453 in the most recent census. In Toronto, the typical house was valued at $413,574. Profs in Toronto need more.

A better measure of whether salaries are fair is to compare them with what’s paid at other primarily-undergraduate institutions in similarly-sized cities. Salaries are slightly higher—$90,527—at Nipissing University in North Bay, Ont. (pop. 53,966), while they’re significantly lower—$80,003—at Cape Breton University, in Sydney, N.S. (pop. 102,250). Brandon profs do well in relative terms.

What lingers then is the question of how much professors are worth to Canadian taxpayers who (I’ll say it again) average $48,458. Do profs deserve to make more than twice the average salary?

That’s a difficult question to answer. Professors train for many years, often work 60-hour weeks and make extremely important contributions to our society and economy. I would argue that they deserve to be paid high professional salaries, based on their local living costs—similar to what police, teachers and nurses make. That is, almost exactly what Brandon professors already make.

Of course, it’s not just Brandon, Man. that should be debating how much professors are worth. A study out yesterday by the Ontario Undergraduate Student Alliance showed that 70 per cent of the increase in cash for universities in Ontario between 2004 and 2010 went toward salary, pension, and benefit costs for professors and (notably) administrators. Students, who are paying punishing levels of tuition in Ontario—$6,307 in 2010—should start questioning those HR budgets.

But sadly, students probably won’t question salaries, just as Brandon’s student union didn’t. Why not? Because students have been led to believe (in part by professors) that six-figure pay is normal. A study out this week found that Millenial females think $100,036 is a normal salary for a university-educated person, while male Millenials think those who hold degrees make $130,139.

That’s incredibly unrealistic. Only four per cent of Canadians make more than $100,000. That’s one in 25 people. “They are the four per cent,” the Occupy movement supporters might chant.

With average full-time professors already in $100,000-plus club, do they need raises? I think not.

Before becoming one of the star investors on CBC’s Dragons’ Den and ABC’s Shark Tank, Kevin O’Leary founded the software firm SoftKey, which later became The Learning Company and merged with Mattel in a deal worth nearly $4 billion. He now heads the investment firm O’Leary Funds and also co-hosts CBC’s The Lang & O’Leary Exchange. His new memoir Cold Hard Truth hit shelves last week.

Q:You offer a lot of lessons in your book about how to succeed in business. Can entrepreneurialism be taught?

A: I actually think being an entrepreneur is a state of mind. If you’re going to be an entrepreneur, my thesis is that you have to sacrifice everything for some period in your life to be successful. You have to be myopic and completely focused and unbalanced in every way. Once you achieve success, you’re free to do whatever you like.

Q: You write about being steered into business by your stepfather and mother.

A: Well, my mom’s attitude was, you’re going to find your own path, and life is serendipitous. She wasn’t as rigorous and hardcore as my dad, who looked at me one day and said, “You’re going to amount to nothing. All you do is party and you want to be a photographer. That’s the most competitive industry on Earth. You’re not that good.” The guy was giving me the truth: you should go back to school and at least get some tools.

Q:There are professional photographers. You could have pursued that.

A: I wanted to do that. I wanted to go to Ryerson. His thesis was: what’s your competitive advantage? What’s your difference? I’ve met with and worked with many photographers now, and I realize that it’s a brutally competitive market and they are really, really good. I honestly don’t think that I have that.

Q: This was your stepdad. Your biological father you describe as being a real salesman. Do you think you inherited that from him?

A: I do. I noticed the other day in a photo of him with his arms stretched in a position I do a lot; it looks just like I do. He died when I was seven. But I remember him. He was a classic Irish partier. A very kind man but also a real renegade.

Q: He lived hard?

A: Very hard. It’s what those Irish guys did. My mother divorced him right before he died and I think he died with a broken heart.

Q:What do you think he would have made of Dragons’ Den?

A: He would have been proud of me. He really missed a lot of life. I think he drank himself to death. It’s something I’m very cognizant of.

I was driving a couple of years ago and Peter Munk, the chairman of Barrick Gold, calls me and says, “Did you know that I came over on a boat with your father from Ireland? He was my roommate.”

Q:Get out of here.

A: No I’m serious. He said, “I just wanted to call you and let you know that he was a great guy.” It was a remarkable moment.

Q:What about your mother? Did she have a chance to see any early episodes of you on television?

A: She did and she was always fascinated by television. She actually enjoyed Lang & O’Leary more than anything. She really respected Amanda.

Q:Your mom factors heavily in your book . . .

A: She was an amazing woman and went through a lot of hardship, but also gave me tremendous guidance and support. She had an investment philosophy that I didn’t appreciate then but I do now. She said, never invest in anything that doesn’t have yield. When she died three years ago, I was executor of her estate and I realized she had every single dime she’d ever made.

Q:That’s still your investment philosophy today.

A: And it works! It really works.

Q:She was a working mom too, right?

A: A working mom. Her father owned [a clothing factory] but his philosophy was that the daughters all had to work on the sewing line. She was the boss’s daughter but not treated differently than anybody else. That’s how I treat my kids, too. When I fly over to see my dad in Geneva, my son has to sit in the back of the bus because I say to him, you have no money. You can’t afford to sit in first class. It’s a good lesson. He gets it. It makes him mad.

Q:Your mom later became the CEO of the family company.

A: It was tough. I had a German nanny. My dad was gone. I had dyslexia.

Q: You write in your book, “Money is the lifeblood of family.” Explain that.

A: Unfortunately it’s the truth. You can say family can be held together by love, but the truth is if there’s no capital there you get into a very bad place. Money puts tremendous pressures on relationships if you don’t have any.

Q:But your parents would have loved you if they were broke and living in a shack, right?

A: Yeah, but you know . . . money tears families apart for lack of, and for too much. It’s a very powerful force and you have to understand it and respect it.

Q:People would probably be surprised to hear about your whirlwind childhood—living in Cambodia, where your stepdad worked for the UN, going to military college in Quebec. Was that hard?

A: It was hard. I think back and think I missed something. But at the same time it gave me an appreciation of the world. I own real estate in Cambodia because I know it’s a great place for real estate. No one else knows—but I lived there for two years and I’ve been back.

Q:What did you learn at military college?

A: The discipline of getting up at 4:30 in the morning.

Q:Do you still do that?

A: I do. I get up between 4:30 and 6:30 every day.

Q: Were you a popular kid?

A: I had good friends. What’s happened to me over time is my best friends are the ones I’ve been to war with in business. I make friends inside a company and I stay friends with them the rest of my life.

Q:In one of your early endeavours you worked in TV production, including on Don Cherry’s Grapevine, a half-hour interview show. What was that like?

A: I owned that format. I owned Special Event Television with two partners. The first time I made money was selling Don Cherry’s Grapevine to his son.

Q:Do you channel Don Cherry when you’re on TV now?

A: I really respect Don. When you go on television it’s because you’re trying to create something people watch. He’s very flamboyant, entertaining and I think he taught me a lot about that.

Q: On TV you have a reputation as being the mean guy. You have a story about one man who came up to you in an airport washroom after seeing you on Dragons’ Den and called you an asshole. You’ve said this kind of stuff doesn’t bother you.

A: It doesn’t bother me at all.

Q: It’s hard to believe. Everybody wants to be liked.

A: Here’s why I know I’m right about this. The reason he said that is that I’m simply telling the truth. The one thing about money is you have to tell the truth about it. It’s the only metric in life where there’s no grey. You either make money or you lose money.

A: Because we’ve gone through this journey together; we’ve explored an idea and we’ve come to the right conclusion: it’s stupid. That’s a good outcome. I’m not trying to make friends, I’m trying to make money. My whole theme is just tell the truth.

Q:Let’s talk about The Learning Company, which you sold to Mattel in what turned out to be an epically bad merger.

A: You know, what’s interesting is the company is back [under new ownership] with all the same brands and doing very well. I think Mattel squandered a fantastic asset. One of the big motivations in writing this book was to set right what actually happened after they acquired the company. In my mind I’ve cleared the record.

Q:Obviously you’ve heard all the criticism: that TLC wasn’t profitable, that Mattel was somehow deceived.

A: Of course, if any of that were true it would have come out in the litigation. None of it was. They had forensic accountants tear our books apart for two years.

Q:You talk about how a culture clash between your software firm and a big bureaucratic toy maker ruined what could have been a good deal. The failure must have really bothered you.

A: It made me crazy. I was out of my mind unhappy.

Q:You and the CEO of Mattel, Jill Barad, both lost your jobs.

A: Well, I mean, I wasn’t happy being an employee anyway. I had a three-year non-compete. It was the most miserable time of my life. I was making the largest salary I had ever made and I wasn’t allowed to work.

Q:You once managed to get a meeting with Steve Jobs, where you asked him to pay TLC to keep carrying Mac-compatible software. What was he like?

A: He was so abusive! Toughest guy I ever met. We were in the boardroom at Apple and he went into a diatribe like I had never heard before. But we eventually did a lot of business with Apple. He’s a tough guy. Maybe that’s why it works. And hey, there’s an asshole!

]]>http://www.macleans.ca/general/on-his-unconventional-childhood-what-steve-jobs-is-really-like-and-what-don-cherry-taught-him/feed/9What’s the use of saving money?http://www.macleans.ca/economy/business/whats-the-use-of-saving/
http://www.macleans.ca/economy/business/whats-the-use-of-saving/#commentsTue, 27 Sep 2011 13:30:01 +0000http://www2.macleans.ca/2011/09/29/what%e2%80%99s-the-use-of-saving/How years of ultra-low interest rates have punished savers, rewarded spenders, and now might be smothering any hopes of recovery

Steven Patterson and his family moved to Vancouver from Cambridge, Ont., in mid-2008, just as the financial crisis hit. After years of scrimping and saving to pay off their first mortgage, they had earned a tidy profit when they sold the Cambridge house and put the proceeds into GICs, where the money would be safe and easily accessible should they decide to buy another home in B.C. Three years later, Patterson, a 42-year-old IT manager, is still sitting on the sidelines, renting, while real estate prices march ever upward in a city where a three-bedroom bungalow covered in warped siding can fetch $1 million.

That might seem like a prudent move in an uncertain economy, but Patterson says his cautious approach has come at a steep price: all his money is steadily being eaten away by inflation, which the meagre interest income from his GICs can’t cover—particularly after the taxman takes a cut. Meanwhile, several of Patterson’s friends have taken advantage of those same low interest rates, loaded up on debt, and bought into Vancouver’s frothy housing market in recent years. And they have enjoyed a windfall—at least on paper—as the value of their homes continues to climb. As for Patterson, “I’m only a few thousand dollars ahead—minus inflation,” he says, clearly frustrated. “So actually, I’m way behind, and I don’t have a house.”

Welcome to the world of ultra-low interest rates, where profligacy is richly rewarded and saving is, well, for suckers. Those who’ve opted to be austere with their personal finances have found themselves on the losing end as governments and central bankers have worked to get people to borrow and spend in the wake of the global recession. While emergency interest rate cuts were to be expected after the financial crisis seized up lending markets, it’s been nearly four years since central banks started slashing rates to the lowest levels in history. For that matter, over the last 10-year period, following the 9/11 terrorist attacks, the Bank of Canada’s benchmark interest rate stayed above four per cent for just six quarters (in 2006 and 2007), while the average headline rate of inflation over that time was 2.1 per cent.

As a result, those saving money have seen almost nothing in the way of returns for a painfully long time. In fact, after accounting for inflation, anyone who dares to be prudent risks seeing the value of their money decline. If one were to put $10,000 into a five-year GIC at two per cent this year, and assume headline inflation goes no higher than the current rate of 2.7 per cent, the future value of that investment in 2016 will have shrunk to around $9,670. (The consumer price index the Bank of Canada uses when setting interest rates is lower than the headline rate because it excludes volatile items like fuel and food, which is fine, if you don’t drive, or eat.)

For seniors and others living on fixed incomes in particular, low rates threaten to wipe out their savings. Yet it’s also depressing for those in the second half of their careers who don’t have an appetite for risk but feel they now have no other choice. “People in their 50s are worried about what they’re going to retire on,” says Susan Eng, vice-president of advocacy at CARP, which works on behalf of aging Canadians. Between the carnage in stock markets and the collapse of interest rates, “there’s a huge amount of anxiety. You’re asking for a lot of trouble with this situation.”

Some will argue people like Patterson are simply bitter because they didn’t buy into Vancouver’s soaring housing market. And yes, those who take risks should enjoy the potential for greater rewards. That principle is at the heart of capitalism. Only, in the current environment where central banks have pushed down interest rates to abnormally low levels, and government policies encourage consumption over thrift, the dynamics of risk and reward have been severely distorted.

This isn’t how it’s supposed to work. From the moment children are given their first penny, it’s driven into us that saving is a virtue and the path to financial security starts with that ceramic piggy bank on the dresser. Only now, with policy-makers in a desperate race to reignite economic growth, all that has been turned on its head. Yes, Bank of Canada governor Mark Carney and Finance Minister Jim Flaherty have repeatedly warned Canadians not to take on too much debt, but their policies, and those of their colleagues in countries like the United States and Great Britain, have had the opposite effect, encouraging people to buy homes, cars, flat-screen TVs or take a plunge into volatile stock markets—anything, that is, but save.

“We’ve got ourselves into a position where debt and spending seem to be highly valued, but saving, which is prudent and helps people plan for their futures, seems to be almost looked down upon,” says Simon Rose, who works with Save Our Savers, a British organization that’s taken up the fight for downtrodden penny counters. “It’s unfair that the problems of the economy should be disproportionately shouldered by savers rather than those with a tendency to borrow too much and get into trouble.” No one is saying Canadians should abandon thrift and go on a wild spree of gluttonous consumption. Indeed, Ottawa has set up tax-free savings accounts to encourage people to save. But the competing priority of spurring economic activity means the interests of savers have taken a back seat and made it that much harder to act responsibly. What’s more, while central bankers have undone basic thinking about saving in the name of juicing the economy, a growing chorus of critics claim that strategy has not only failed to turn things around, but the dogged pursuit of low rates might be weakening the recovery

Sometimes Lee Tunstall wonders why she bothers saving at all. A child of parents who grew up during the Second World War and instilled in her the importance of living within her means, Tunstall, a consultant in Calgary, has rented the same apartment for 17 years and dutifully contributes to her conservatively managed RSP account. Yet all around her, friends have piled on huge mortgages and run up towering lines of credit debts in the past few years to buy homes and new Bimmers for the driveway. “If you are a saver you’re absolutely losing money to inflation, and if you go into the markets you’re losing money there too, so why bother?” she says. “Sometimes I think, ‘Why don’t I just join the herd and do what everybody else is doing, buy the toys and live it up like everybody else?’ ”

Tunstall would have plenty of company were she to give up her frugal ways. Gone are the days when Canada was a nation of savers. In 1980, the personal saving rate peaked at above 20 per cent and was still around 13 per cent in 1995. Today it stands at just 4.1 per cent. At the same time, over the last decade Canadians have increasingly relied on debt to maintain their lifestyles. The average household now owes $151 for every $100 of disposable income, a higher level than even American households reached in 2007 as the air rushed out of the U.S. housing bubble. This week, Moody’s, the credit-rating agency, said it is increasingly uneasy with the consumer debt mountain rising in Canada. “We are concerned that Canadians are relying on low interest rates to support high debt levels,” the agency said in a statement.

Much of that growth in debt has taken place since 2007, when the Bank of Canada cut its overnight rate from 4.5 per cent to a low of 0.25 per cent in 2009. The dramatic cuts, along with stimulus programs targeted at the real estate sector, revived house prices, which had begun to tumble. As of June, the Teranet-National Bank House Price index has nearly doubled over the last decade, while in markets like Vancouver, prices have soared a whopping 140 per cent. That shouldn’t have been a surprise; reckless behaviour gets a boost when government and central bank policies punish individuals for not taking part. But while the cuts were a boon to mortgage borrowers, they’ve sideswiped the saving crowd.

One way to measure the impact is to look at how much interest income is being lost as a result of low rates. Stephen Johnston, a Calgary money manager, estimates that with roughly $1.2 trillion on deposit at the banks and rates roughly three percentage points below their historical average, savers are losing out on $30 billion to $40 billion every year in interest income. He argues this amounts to a massive subsidy for the country’s banks, since the rate depositors are paid to part with their money is far less than what the banks can earn lending that money out to other people as mortgages. “Deposit rates now cost the banks nothing, but that’s not free,” he says. “Someone else is paying the price, and it’s little old ladies and people on fixed incomes who can least afford it.”

As bad as the situation is here, it’s even worse in the U.K. Last month, figures from the Bank of England showed that since 2008, when the central bank slashed the interest rate to 0.5 per cent, savers there have lost out on $66 billion of interest income. What’s more, the bank estimates mortgage borrowers have benefited to the tune of $79 billion. Meanwhile in the U.S., where rates are virtually zero and the Federal Reserve recently vowed to hold them there until 2013, the suffering inflicted on the saving crowd is especially severe. In a recent analysis for the American Institute for Economic Research, William Ford, a former president of the Federal Reserve Bank of Atlanta, estimated American savers have seen anywhere from US$256 billion to US$587 billion in potential income vanish. “None of the supposedly favourable effects [of low interest rates] are actually happening, and instead it’s having a very strong negative impact on savers,” Ford told Maclean’s. “It’s killing savers. Retirees are getting negative returns on their life savings.”

With Canada’s overnight rate at an almost-princely one per cent compared to the U.S., savers have at least had that going for them. Unfortunately, Canada’s economy shrank by 0.4 per cent in the second quarter, reviving calls for more rate cuts. At the very least, Carney now says the need for a rate hike has been “diminished.”

But as policy-makers consider a fresh round of monetary easing, some in the U.S. are warning that low rates, and their punishing effect on savers, could be doing the economy more harm than good.

While the Bank of Canada’s interest rate policies have been credited with helping Canada quickly recover from the recession, in America unemployment is still stubbornly high while house prices have continued to fall. Raghuram Rajan, a finance professor at the University of Chicago and the former chief economist at the International Monetary Fund, sees this as evidence that perpetually low rates—a long-established tool for repairing broken economies—are simply failing this time around. Instead, he believes an overlooked cause of the recovery’s sluggishness lies with America’s devastated savers.

Consider the example of China for why that is, says Rajan. For years, China has kept interest rates artificially low—well below the rate of inflation—partly to drive down its currency but also to make it easier for manufacturers and builders to access capital. That’s had the unforeseen consequence of sapping consumer spending, too, which has shrunk as a share of the economy from 50 per cent in the 1990s to just 35 per cent today. When Chinese families who are saving for their children’s education, or to take care of an elderly parent, see their savings eroded by low rates and inflation, they have responded by spending less and saving even more.

Rajan believes the same phenomena could be at work in America today. “Your traditional spenders are hesitant about splurging again, while low rates mean your savers are cutting back because their incomes are falling,” he says. “Giving savers a better deal by raising rates from abnormally low levels may help rather than hurt the economy.”

For its part, the Bank of Canada is in a difficult spot. If it leaves rates low indefinitely, there’s the very real risk more Canadians will decide saving is a suckers’ game and start to pile on debt. Yet when the bank eventually does raise rates, which it must, someday, over-indebted households could spark a fresh crisis. “Previous generations used to buy a house that was twice their household income, but now families are spending 10 to 12 times what they earn,” says David Trahair, a financial author whose new book, Crushing Debt: Why Canadians Should Drop Everything and Pay Off Debt, is due out in November. “The central banks are in a bind because they can’t increase interest rates or it will be extremely punitive to these people with mountains of variable rate debt.”

Whatever happens, Ritchie Hok, an actuary living in Ottawa, is convinced savers will ultimately wind up paying the price for others’ imprudence. At the peak of the U.S. housing bubble, Hok lived in Minneapolis and saw the excesses first-hand. While there he resisted those who urged him to get into the market; a wise move given prices are down 40 per cent there. Now that he’s in Ottawa, though, he’s hearing all the same arguments for why he should take advantage of low rates and buy a house before prices rise even further. He’s convinced Canada’s housing market is a bubble that will eventually burst, and when it does, policy-makers will rush to people’s rescue. “My fear is that most people in Canada are now debtors and not savers, and so governments will enact policies to help them because they make up most of the population,” he says. “Savers may get screwed on the way down, too.”

If Hok is right, the frugal few could be in for even more pain ahead. Why is it again that it pays to save?

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These days, Richard Kelertas, a financial analyst at Dundee Securities, isn’t saying much about Sino-Forest, the beleaguered Chinese forestry company at the centre of a fraud investigation by regulators. “I’m not speaking with the press or anyone, unfortunately,” he says. That is unfortunate, because a lot of investors who followed Kelertas’s advice to buy Sino-Forest’s shares—either before the company got into trouble, when he insisted Sino-Forest was a “class act in timberland management in China,” or after, when he called the fraud allegations a “pile of crap”—no doubt have a few choice words for him.

The Sino-Forest debacle has the potential to be the biggest stock market scandal to hit Canada since the Bre-X gold-mining fraud in the mid-1990s. Until June, Sino-Forest was the most valuable forestry company on the Toronto Stock Exchange, with a market capitalization of $6 billion. Then Muddy Waters Research, a U.S. investment firm, issued a damning report that claimed Sino-Forest “massively exaggerated its assets” and is nothing more than a Ponzi scheme. Muddy Waters said it was short selling Sino-Forest, or betting that the company’s share price would plunge. It did. By the time the Ontario Securities Commission suspended trading in the stock on Aug. 26 and raised its own concerns about fraud, Sino-Forest had shed three-quarters of its value.

At this point none of the allegations have been proven. The OSC’s accusations of fraud at the company could ultimately prove unfounded. This still may turn out not to be “Tree-X.” Even so, investors would be right to wonder why a company with the potential to completely collapse on the basis of a single critical report was regarded so highly by analysts in the first place. Kelertas wasn’t alone in his effusive praise of the company in recent years. Of the 10 analysts covering Sino-Forest before the Muddy Waters report hit the street, nine rated the stock a “buy” or “outperform,” while just one considered it a “hold,” according to Reuters.

No one should be surprised that the financial experts seem to have blown it. Again. Wall Street analysts completely missed the frauds at WorldCom and Enron, while closer to home, Nortel’s accounting shenanigans went undetected. In the case of Bre-X, several analysts embarrassingly insisted right up to the bitter end that the company’s Busang claim in Indonesia really was the world’s biggest gold deposit, even in the face of evidence it was a sham.

Bungled analysis isn’t unique to equity analysts, of course. The credit rating agencies, such as Standard & Poor’s and Moody’s, infamously gave their most-coveted blessing to worthless debt securities during the U.S. housing bubble and played a leading role in deep-sixing the global economy. (The rating agencies also missed potential problems at Sino-Forest, slashing their ratings and eventually ending coverage of the company’s debt only after Muddy Waters made its fraud allegations public.) As for the economists who accurately foresaw the recent financial crisis, they’re as rare as the northern hairy-nosed wombat.

Whether watching the stock market or the economy, those who are paid to figure out what will happen in the future and inform investors have repeatedly shown they’re unable to get it right. It’s not just that it’s impossible to consistently and accurately predict the future. Financial experts are saddled with conflicts of interest and psychological baggage that can warp their research. The sooner investors realize this, the better off they’ll be.

Frauds and financial meltdowns are, thankfully, quite rare. On a day-to-day basis, though, analysts are still often way off the mark with their research. Last year, the consulting firm McKinsey looked at a quarter-century of analysts’ earnings forecasts and compared them to the actual earnings companies eventually reported. The focus of the study was on sell-side analysts, meaning those employed by brokerage firms that help bring new companies to the stock market. Mc­Kinsey found that, year in, year out, sell-side analysts were “typically over-optimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.”

The tendency for analysts to be cheerleaders for stocks rather than skeptics is reflected in the overwhelming number of buy recommendations on stocks, which consistently outnumber sell recommendations by a ratio of nine to one. Last month, after the headphone maker SkullCandy debuted in a US$190-million IPO, six analysts from the firms that underwrote the offering all labelled it a screaming “buy.”

It’s too bad that analysts don’t issue more sell recommendations, because those are actually the stocks investors might do best to consider. Earlier this year, Bloomberg analyzed the performance of S&P 500 stocks since the market bottomed out in March 2009. It turns out those stocks with the most buy recommendations dramatically underperformed stocks that analysts disliked the most. In other words, it can pay to do the opposite of what analysts say.

The thing is, when frauds do happen and analysts completely miss them, it’s not clear they share in the pain with investors. In the days before Bre-X was exposed as an utter lie, analysts remained bullish on the company despite widespread rumours its gold find was a hoax. Egizio Bianchini, a mining analyst at Nesbitt Burns, told investors he’d been to the exploration site and testing labs and could vouch for their work. The rumours, he said, were “so preposterous, I am not even going to address the possibility.” He added, “The gold is there.” While Bianchini was eviscerated by investors and their lawyers when the fraud was exposed, he retained his job. Just this past April, Bianchini was promoted to vice-chair at BMO Capital Markets (the renamed Nesbitt Burns division). Meanwhile, other analysts who also defended Bre-X continue to be mining analysts or are directors of mining companies.

None of this explains why analysts can’t seem to get it right. Many argue it’s because of conflicts of interest. Sell-side analysts typically get paid based on the trading commissions generated by their research, so it’s in their interest to encourage people to buy a stock. In the case of the credit raters, S&P and Moody’s were paid to rate worthless mortgage-backed securities by the very investment banks selling the ticking time bombs to investors. “It’s in the interest of the financial industry to sell certain products and it’s not in their financial interest to see problems with those products,” says Ermanno Pascutto, executive director of FAIR Canada, an investor rights organization.

Having said that, Pascutto admits it is the nature of the markets that analysts will sometimes get it wrong, even when they act in good faith. The potential for errors is just that much greater for analysts covering companies in emerging markets, such as Sino-Forest. “The Canadian financial industry doesn’t have much expertise in these markets,” says Pascutto, who in the 1990s helped set up the Hong Kong Securities and Futures Commission. For all the visits analysts made to Sino-Forest’s operations, language and cultural barriers make it impossible to do the same level of due diligence as in Canada. “You can’t just apply the knowledge you have about a business in a developed economy and assume the same rules apply in an emerging market,” says Pascutto.

Aside from all that is the simple fact that analysts and economists are human beings, plagued by the same psychological biases as everyone else. For instance, the herd mentality is a powerful force. When economists’ models all point to another year of GDP growth, or all the other analysts covering a stock are bullish, taking a contrarian view will invariably draw attention, particularly if that contrarian argument proves wrong. Even those who do stick out their necks are prone to self-defeating mistakes. For a recent paper published in the Journal of Economic Behavior and Organization, John Beshears, an assistant professor of finance at Stanford University, sifted through thousands of earnings forecasts for examples of analysts who broke from the pack. In cases where their divergent forecasts were proving to be wrong, the analysts were reluctant to adjust their estimates to reflect new data. The more their forecast differed from consensus, the more stubborn they became and the more they escalated their commitment to their erroneous forecast.

“People are reluctant to admit their mistakes and move on,” he says. “An analyst is likely to try to justify their past actions by upping the ante in the hopes of being vindicated in the long run, even if the chances are they won’t.” Which could explain why analysts are often reluctant to admit they missed a fraud. After researching a stock faithfully for years, admitting there are problems means acknowledging not only that you missed them, and unwittingly mislead investors, but that all that time and effort was wasted.

This all presents a dilemma for investors. For all their faults, analysts can tap information regular investors could never get, such as access to management at companies. So there is value in the recommendations of analysts, but it needs to be viewed with an understanding of their weaknesses.

There’s another thing to consider when weighing the quality of the financial experts. If they truly believed they knew what the future held, they’d most likely have launched their own fund to act on it. Similar to the idiom, “Those who can’t, teach,” on Bay Street and Wall Street it’s: “Those who don’t completely trust their own advice, sell it to others.” Having skin in the game is no guarantee for success—the fact that several prominent billionaire investors lost hundreds of millions of dollars on Sino-Forest proves that—but it’s much easier to dispense advice when it’s other people’s money at risk.

Ultimately, analysts are the storytellers of the financial world, and for years Sino-Forest was a terrific and exotic story. Until it wasn’t. Investors just shouldn’t have relied entirely on analysts to tell them that.

]]>http://www.macleans.ca/economy/business/really-bad-advice/feed/6In conversation: David Chiltonhttp://www.macleans.ca/general/on-the-illusion-of-wealth-and-why-so-many-are-so-far-behind-in-saving-for-retirement/
http://www.macleans.ca/general/on-the-illusion-of-wealth-and-why-so-many-are-so-far-behind-in-saving-for-retirement/#commentsWed, 07 Sep 2011 15:10:36 +0000http://www2.macleans.ca/?p=212339On the illusion of wealth, and why so many are so far behind in saving for retirement

In 1989, David Chilton published The Wealthy Barber, a seminal book on money, focusing on three people in their 20s who visit Roy, a barber, for lessons on financial planning. It went on to sell more than two million copies, making it one of the bestselling Canadian books of all time. Now, more than 20 years later, and in the wake of the 2008 financial crisis, the 49-year-old has released the long-awaited follow-up: The Wealthy Barber Returns, which hits bookshelves this week.

Q:How old were you when you first published The Wealthy Barber?

A: I was 25 when I started writing it and 27 when it came out. I was very lucky. I really was. Interest rates had just started heading on a steady path downward and that was really important because it made people realize they couldn’t just rely on GICs [guaranteed investment certificates], they had to start looking for other investments. And that meant they needed some knowledge. Also, there was almost no competition. When The Wealthy Barber came out, there were only two other Canadian personal finance books in the marketplace. Now there are hundreds.

Q:Why did you approach the book the way you did?

A: When I was a young stockbroker I liked about three or four of the personal finance books in the United States. They were very well done. And a couple of them, I thought, were quite understandable. So I got copies of the books and gave them to clients, but they still didn’t like them. They still found them boring and intimidating. I thought: there must be a way to make this more fun and more palatable. Actually, the first [incarnation] of the The Wealthy Barber was called The Wealthy Bartender. I set it in a bar and wrote three or four chapters along that line, but the alcohol got in the way. I’m not saying that to be funny. It’s quite true. Because I was trying to keep it realistic, you have to involve the alcohol and it just got too muddy. So I took it out and put in a barber shop, and I’m glad I did. I think it’s something people could visualize.

Q:So what have you been doing for the last two decades?

A: The first five or 10 years I did an incredible amount of public speaking and not much else. We went down to the U.S., where we put out a U.S. version of The Wealthy Barber and it was converted into a TV series on PBS. So I toured with the TV series and did a lot of speaking down there, as well as in Canada. So the first decade was a little bit crazy. But the last 10 years have been very different. I got involved in everything from home schooling my kids to publishing cookbooks, which kept me very busy because they also ended up being quite successful. For the last two years, I was almost off everything and worked on the new book.

Q:What made you decide, after such a long time, to come back and write another personal finance book?

A: It was really about frustration. In 2007 and 2008, and before the credit crisis by the way, I had been looking at so many people’s personal finances—people email them to me every day—and saw the amount of debt they were taking on. The very low savings rates just drove me crazy. I couldn’t believe how many people were headed toward retirement in not good shape at all, including fairly affluent people. So I said, “You know what? I want to come back at this and try one more time.” And I knew how I was going to do it right away. I knew that the first half of the book was going to concentrate on saving and spending from every angle I could think of, while the second half I was going to put in some random thoughts.

Q:What really struck me about The Wealthy Barber Returns is the focus you put not just on saving more, like in the first book, but on spending less—this idea of living within your means. But that doesn’t seem like the sort of thing that’s going to be popular with people. Most personal finance books tend to come at it from the perspective of telling you how to get what you want.

A: That’s exactly what I’m trying to do. I’m telling people to manage their expectations and get more realistic ones. There’s a line in the book, which, at the time, didn’t seem all that important, but is really an important part of what I’m trying to say. And that’s that we’re not bad savers, it’s that we’re fantastic spenders. And until we get the spending under control, the saving will never take place. So what I tried to do is look at why we spend so much and then talk about the savings part. But you’re right, I do focus more on the spending part than most writers. And that’s the part of the book that’s so far going over the best. That’s resonating with people because they see themselves in a lot of those stories, making the same mistakes. Most people agree that this drive toward consumption and possessing as much as we possibly can is not translating into better happiness levels. In fact, it may be doing the opposite by creating tremendous stress about people’s futures, financially.

Q:Is this advice that you live by? Because people might look at you and say, “Okay, but it’s not like the guy who wrote a bestselling book is going to be stopping himself from buying a new TV”?

A: I live in a 1,300-sq.-foot house—and that’s including the basement. And I don’t even have a garage. I live in a very tiny house.

Q:No gold fixtures?

A: No. I don’t even know what granite countertops look like. I’m just not into that stuff. So, I guess I’m lucky in that way because I don’t have to fight the spending urges like a lot of people. I just don’t get that much enjoyment out of stuff, period. So maybe it’s a little easier for me. But I think most people will agree that we’ve gone too far on the consumption front, and that possessions are driving too many of our passions now and too much of our spending.

Q: Do you splurge on anything?

A: Oh, for sure. Everybody does. In my case, what I’ve spent a lot on over the years is going to professional sporting events. I’m a Detroit Tigers, Lions, Red Wings and Pistons fanatic. So I’ll go down to a tremendous number of games with my kids, including playoff games. I think even really good savers tend to have areas of weaknesses where they spend a lot, and get a lot of joy from it. But the key is that they cut back elsewhere. And what I see so often now is that’s one thing many people aren’t willing to do. People will spend excessively on travel but won’t make the cuts elsewhere. They use the line of credit instead. And that’s why so many people are so far behind in saving for their retirement. They don’t want to make any compromises or sacrifices.

Q:Okay, so this is a relatively simple strategy: save more and spend less. But what are people supposed to do with the money they do manage to save, because after the financial crisis, a lot of people are wondering: where are those stable, long-term investments that Dave Chilton was talking about in his first book?

A: Well, there’s no such thing as stable. And that’s one of the things people have to get their head around. If you want market returns, you also have to accept market volatility. If you’re going to make a bet on equities, you’ve got to be thinking 10, 15 or 20 years out. And you have to recognize there’s going to be some really ugly times. Major pullbacks. Extended periods of poor performance. And it’s not easy. It’s one thing to say that, but it’s tough to live through it.

Q:I also want to ask you about real estate. For many Canadians, buying a house has become part of their retirement planning.

A: Yes, too much so.

Q:When you see these stories about soaring housing prices in cities like Toronto and Vancouver, do you say, “This is craziness”?

A: In Canada, a lot of real estate markets are at their top limit. You can say that with a fairly strong conviction because you can compare it to incomes. At the very least, real estate is going to start stabilizing at these levels. I don’t think you can continue to post these kinds of performance numbers. But that is very hard to predict. The bigger picture to all of this, though, is that a lot of people think they’re wealthier than they actually are because they have a fully paid-for $600,000 home. But you can’t spend your kitchen. And if you don’t have any savings or a defined benefit pension plan, you’ll be looking at that home later in life and be thinking it’s such a great asset. Well, is it? Are you going to sell it and move way down? Most people don’t do that, so they’re having trouble harnessing that equity and turning it into a productive retirement asset that spins off an income. A lot of people have this illusion of wealth. I see this over and over again. Frankly, I have friends who are in this situation.

Q:When do you plan to retire?

A: Never. I can honestly say I don’t think I’ll retire even when I’m 75. I really enjoy what I’m doing. That’s never crossed my mind.

Q:Will you write any more personal finance books?

A: I doubt it. This was a lot of work. It took me 26 months. I wouldn’t say definitively no, but it’s unlikely. Truthfully, one day I would really like to write a play.

Q:With a personal finance focus?

A: No. I will spare you that. I’ve always wanted to write a play. So maybe in a few years I will take a year off and at least try that. I have no idea whether I would be any good at it, but I want to give it a shot.

]]>Conservative MPs on the finance committee move to ensure you are not frightened by this week’s hearings.

At a planning meeting Monday evening, NDP finance critic Peggy Nash put forward a motion requesting that a panel of economists be included as witnesses Friday, but the Conservatives used their majority to limit the invite list to Mr. Flaherty and Bank of Canada officials.

“It’s imperative, in my opinion, that we not do anything that might worry Canadians. And I think that hearing from the Minister of Finance and the Bank of Canada will help to reassure them, as they should be, that there is concern, but that we are proceeding, as parliamentarians, in their interests,” explained Conservative MP Shelly Glover, who is Mr. Flaherty’s parliamentary secretary.

]]>Deutsche Bank, that most treasured of German national institutions, has picked an Indian executive to be its new CEO. Last week, the bank revealed that Anshu Jain, currently working for Deutsche Bank in London, will be filling the shoes of outgoing chief executive Josef Ackermann, who is scheduled to step down in May. Jain currently heads the bank’s investment banking operations, which accounted for nearly 90 per cent of its pre-tax first-quarter profits this year. But the 48-year-old Indian native speaks little German and doesn’t know his way around the corridors of corporate and political power in Frankfurt and Berlin. That’s why the bank also appointed Jürgen Fitschen, a German who currently oversees Deutsche Bank’s national operation, as a co-CEO. In addition, the duo might get some tips from current CEO Ackermann, who is slated to head the bank’s supervisory board.

The complex succession scheme has received mixed reviews from investors, many of whom fear a triumvirate at the top will lead to leadership struggles and slow down decision-making. But, as others suggested, an Indian alone at the helm of Germany’s financial crown jewel might have been too much of a cultural shock for many Germans.

]]>UAlberta posts deficit of $4.9 millionhttp://www.macleans.ca/education/uniandcollege/ualberta-posts-deficit-of-4-9-million/
http://www.macleans.ca/education/uniandcollege/ualberta-posts-deficit-of-4-9-million/#commentsMon, 21 Mar 2011 20:14:45 +0000http://oncampus.macleans.ca/education/?p=24435For the second year in a row, the university is in the red

]]>For the second year in a row, the University of Alberta board of governors has approved a deficit budget. For 2011-12, the university will be $4.9 million in the red, but that figure is down significantly from last year’s $14.8 million deficit, the Edmonton Journal reported. Provost Carl Amrhein, says the U of A was able to improve its finances because of a combination of staff layoffs, furlough days for faculty, government approved tuition increases, and provincial funding for operating and utility costs for new buildings. When asked if there would be layoffs this year, Amrhein said it was a possibility, but could not say for sure. “There are too many sources of change in big faculty budgets to be able to predict at this point,” he said.

]]>With debt to income ratios in Canada surpassing that of Americans for the first time in more than a decade, a federal task force is calling for financial literacy to be taught at all education levels. The report, submitted to finance minister Jim Flaherty on Tuesday also recommends the government name a “national leader” to head a national strategy on literacy, and create a “single source” website where Canadians can access basic financial information. In total there were 30 recommendations. The task force was created in 2009 and is chaired by Sun Life Financial CEO Donald Stewart.

On the surface, it would seem like a bad time for Nova Scotia’s High Liner Foods Inc., which makes frozen fish sticks and other prepared seafoods, to go fishing for an acquisition in Iceland. In recent months, local pop star Björk has mustered a remarkably successful campaign aimed at overturning another Canadian-led takeover effort: Magma Energy Corp.’s recently completed purchase of geothermal power producer HS Orka. Just last week, Björk held a three-day karaoke marathon that helped to boost signatories of a local petition against the Magma deal to more than 46,000, or about 15 per cent of Iceland’s population, causing Iceland’s prime minister to hint that a public referendum on the deal could yet be forthcoming.

But that hasn’t stopped High Liner, headquartered in picturesque Lunenburg, N.S., and known for its salty, grey-bearded fisherman logo, from steaming ahead with its plans to buy Icelandic Group, which controls a network of independent seafood processing companies in Europe, North America and Asia. If successful, High Liner, already a leader in Canada, would become a major force in the huge U.S. market supplying seafood to supermarkets and restaurants. There’s just one problem: Icelandic’s owners, a consortium of public pension funds called Framtakssjóður Íslands, aren’t interested in selling—at least not to High Liner.

Kelly Nelson, High Liner’s chief financial officer, says the company has been eyeing Icelandic for years and was assured that if the company’s foreign processing businesses ever went on the block, High Liner would have an opportunity to bid in an open auction (producers located in Iceland itself aren’t believed to be for sale). “We found out that they have entered into exclusive discussions with a German private equity firm called Triton,” Nelson says, noting that Icelandic has been in a difficult financial position for a few years, having been previously owned by a state-run bank set up after the 2008 financial crisis. “We also found out through different sources in Iceland that maybe this was an inside deal being cooked up, and we didn’t think this was fair to the Icelandic pension plans that own these assets, or other bidders.”

Nelson says he doesn’t know why High Liner is being shut out. The company has put forward a bid valuing Icelandic at 340 million euros, or $448 million, but has received no response. But he says it’s doubtful that it has anything to do with the nationalistic opposition to the Magma deal. “The Magma thing has never come up,” he says. “This is a worldwide company that has operations in Iceland, which are not for sale.” It’s not clear whether Björk has formed an opinion on the issue. Her opposition to the Magma deal appears to have more to do with the sale of the country’s energy and resource assets, as opposed to outright protectionism. Icelandic’s pension fund owners said in a statement that talks with Triton are continuing. A spokesperson declined to comment further.

High Liner has been bulking up its business lately. Four years ago, the company paid $158 million for the North American marketing division of Fishery Products International, including plants in Burin, Nfld., and Massachusetts. Then, last December, it paid US$31.5 million to buy Massachusetts-based Viking Seafoods Inc. as part of a move to expand its presence in the United States.

Now High Liner is poised to take a leadership position south of the border by buying Icelandic, which, through its U.S. operations, is a major competitor. “To carve out that kind of leadership position in the U.S. market for any Canadian company is significant and game-changing,” Nelson says, adding that the industry is going through a period of significant consolidation worldwide.

As a result, High Liner is not willing to let Icelandic slip away quietly. As part of a last-ditch effort, the company’s advisers suggested High Liner go public with its bid in the hopes that it would put pressure on Icelandic’s public pension fund owners to hold a public auction. “They said, ‘Look, Iceland’s a pretty small place and this is a pretty big company, and if people got wind of this [private deal] they would be pretty upset,’ ” Nelson says.

So far, the campaign seems to be having a desired effect, generating significant media coverage in the island country. But has it given High Liner a seat at the negotiating table? “There hasn’t been anything material that’s transpired,” Nelson says. “But it’s not a dead issue either.”

]]>http://www.macleans.ca/economy/business/fish-stick-empire/feed/2‘The stock market is for suckers’http://www.macleans.ca/economy/business/the-stock-market-is-for-suckers/
http://www.macleans.ca/economy/business/the-stock-market-is-for-suckers/#commentsMon, 24 Jan 2011 14:00:15 +0000http://www2.macleans.ca/?p=167958Facebook is the latest company to 'unfriend' the market

Were it not for the source and recipients of the email—From: Goldman Sachs, To: Our most outrageously rich clients—it would have read like one of those Nigerian investment scams that slip through spam filters now and then. “When you have a chance I wanted to find a time to discuss a highly confidential and time-sensitive investment opportunity,” the secretive missive began. But this was clearly no shady dispatch from Lagos. What investment bank Goldman Sachs offered by way of the emails, sent out to thousands of its most valuable high-net-worth clients in early January, was the chance for them to buy a piece of the hottest company in America: Facebook.

Since the social networking site infused itself into every facet of our lives, investors have anticipated the day when the company would take its place in capitalist folklore beside Microsoft, Netscape, Apple and Google. Everything seemed to be in place—the phenomenal growth, chief geek Mark Zuckerberg’s rapid ascent to Bill Gates-ian prominence, The Movie!! It all suggested we were about to witness one of those rare moments when the spark of innovation meets the greatest wealth-creation machine the world has ever known: the American stock market.

Only that’s not how things have unfolded. In its email to clients, Goldman wasn’t talking about a public stock offering for Facebook. Instead, the bank, along with a Russian investment firm, injected US$500 million into Facebook’s coffers by way of a purely private transaction. Goldman, in turn, set up a fund through which wealthy clients could own those Facebook shares themselves, for a minimum of US$2 million. Based on that valuation, Facebook emerged a colossus worth more than US$50 billion.

Since the deal first made headlines, Goldman has had to backtrack somewhat, due to “intense media coverage.” Regulators were cool to the optics of rich Americans gaining access to hot companies when their less wealthy countrymen were shut out. So last week the investment bank made membership to its Facebook fund more exclusive still. Now only rich foreigners will be invited in.

The stealth arrangement is just the latest sign something is very wrong with Wall Street. The stock market has become dangerously disconnected from its primary function of uniting growing businesses with large numbers of long-term investors. Part of that disconnect can be seen in the growth of a so-called “second market” for private companies­—like Facebook—off limits to all but the wealthy. But there’s more. Markets have come to be dominated by myopic short-term thinking. The vast bulk of trades now involve no humans at all, but rather sophisticated computer programs that swap stocks at lightning speed; many believe so-called high-frequency trading was one of the causes of the flash crash last year that exposed how fragile the whole game has become. And as more Americans have tied their savings to the market, regulators have sought to protect them with layers of rules and red tape that critics say is driving away public companies.

Now there are signs some institutional investors, such as pension funds, are giving up on equities and buying alternative assets like bridges and toll roads instead. No wonder American companies like Facebook are avoiding the hoi polloi of traditional stock markets in favour of raising capital from private, rich investors. “The idea of the stock market was to help businesses raise capital, and to provide people, individuals, with a chance to invest their savings and participate in that growth and have enough money to retire,” says Peter Cohan, president of Peter S. Cohan and Associates, a venture capital and management consulting firm in Marlborough, Mass. “But in the last decade the whole thing seems to have fallen apart.” Where the market once helped investors and companies, now it’s failing both.

In Canada it may seem academic to fret about the faulty mechanics of the U.S. stock market. Yet we should be very much concerned that it’s not working properly. Many Canadian investors put their money into U.S.-listed stocks, and as America’s largest trading partner, we also benefit when that country’s economy is functioning properly.

Perhaps billionaire Mark Cuban, who made his money off the Internet bubble of the late 1990s and now owns the Dallas Mavericks basketball team, has put it best on his blog and in interviews. “The stock market,” he says, “is for suckers.”

Facebook’s decision to shirk public stockholders in favour of rich, private ones has only driven home that point further, and sparked a debate about how America’s rising corporate stars are financing their growth.

Facebook is far from alone in choosing to “unfriend” the stock market. Despite rumours that some high-profile stock offerings could be coming down the pipeline—including social networking company LinkedIn and bargain-shopping site Groupon—the U.S. IPO market has been in decline since the mid-1990s. According to figures compiled by Jay Ritter, a professor of finance at the University of Florida, last year 96 operating companies went public on the major U.S. exchanges. True, that was a rebound from the depths of 2008, when just 21 companies went public. But in the mid-1990s, even before the tech bubble, 400 to 500 IPOs a year was common.

Why does it matter whether companies go public? Because that has historically been the best way for smaller businesses to boost themselves to the top of their industries. Instead, with fewer new companies coming to market, the number of U.S. stocks is growing worryingly thin, leaving regular investors with fewer options to choose from. In a report last fall, the New York Times noted there were 7,500 companies listed on the NYSE, Nasdaq and American Stock Exchange in 1997. Today there are fewer than 4,100. “In the 1990s going public was a badge of honour,” says Cohan. “Now companies look at it and say, ‘If we can avoid it, we will.’ ”

To do that, companies are increasingly relying on private investors, depriving the investing masses of access to exciting new businesses. Private investors are not new to Wall Street. Since the early 1980s, private equity funds have regularly gone shopping for unloved public companies with the goal of fixing them up and then taking them public again. Venture capitalists have also injected untold billions into upstart tech companies with the hope of cashing out with IPOs.

What sets the deal between Goldman Sachs and Facebook apart from previous private financings was the way it targeted large numbers of wealthy individuals while flouting rules intended to stop private companies from doing just that. The SEC bars unlisted companies from accumulating more than 500 shareholders. Anything above that limit means they must disclose financial information, something Facebook is loath to do. So Goldman set itself up as a single Facebook shareholder, while its clients go along for the ride. What’s more, under SEC rules investors must be “sophisticated”—or rich—to buy private company shares, with a net worth of US$1 million or annual earnings of US$200,000 in each of the past two years. Put another way, wealthy people are considered inherently smarter than the rest of us when investing.

The Goldman Sachs financing isn’t the only way private money is allowing Facebook and other companies to avoid the markets. Virtual online exchanges are springing up, where investors in private companies can sell their shares. One of the key reasons companies go public, aside from raising money to fund their growth, is to give venture capitalists and employees who already own shares a way to unlock their money. Two of the largest firms in the burgeoning private company market are SecondMarket and SharesPost, which both launched their private company services within the last two years. As a result, existing shareholders now have a venue to sell their stakes, and companies are feeling far less pressure to go public. In addition to Facebook, shares in scores of private companies now trade on these alternative exchanges, including Twitter, Craigslist, Zipcar and Digg. Not all are Internet companies, though. There are also clean technology and semiconductor businesses benefiting from the shadow market. Nyppex, a New York-based advisory company that specializes in secondary markets, estimates that roughly $4.9 billion worth of private company stock was traded last year, more than double the year before, and it’s expected to continue growing rapidly. Once again, regular investors can forget about participating, though—these alternative markets are also off-limits to all but the rich.

There’s a much darker side to all this stealth trading in private company shares, argues Cuban. “We are seeing people who are trying to game the system,” Cuban told Maclean’s in an email interview. “The expectation is that [a company] will go public at a significant premium and the secondary market is a way to ‘get in on the IPO’ at a lower cost.” After all, for rich investors who snap up Facebook shares by way of the Goldman Sachs deal or through SharesPost and SecondMarket, the ultimate way to profit will be for Facebook to go public. By then, though, the value of the shares will have been bid up, and much of the company’s best growth may be behind it. The very real risk is public stock market investors could be left with an overpriced heap.

For now it seems many private companies seem intent on staying that way. One reason for that, some believe, are increasingly onerous rules that accompany a stock listing. For instance, Andrew Lo, a professor with the Massachusetts Institute of Technology’s Laboratory for Financial Engineering, points to the impact of the Sarbanes-Oxley Act, the sweeping rules passed in the wake of the dot-com crash and Enron scandal. Critics say the legislation does little to prevent frauds, but has driven up the costs for companies that go public. “There are enormous costs to being on the public market, thanks to Sarbanes-Oxley and other regulatory changes,” says Lo. “It’s become a lot more expensive to be a public company. So now you can access capital through hedge funds and private equity firms without the costs of going to the stock market.”

It’s important to remember why regulators have felt compelled to layer on so many rules. Over the last 40 years there’s been a radical reshaping of the investment world as retail investors rushed into the market. Since the late 1970s American investors have gone from having less than US$100 billion (adjusted for inflation) tied up in equity mutual funds to a staggering US$12.6 trillion in 2007. Where in 1980 fewer than six per cent of households invested, now roughly half do. Analysts have hailed this as the “democratization of finance.” As more people took control of their own retirements, it was generally seen as a good thing for American society. But with last decade’s back-to-back crashes, leaving the market where it was 11 years ago, that also means the pain was democratized, too. Panicked politicians reacted by passing new laws. Now it seems the very rules established to keep regular investors safe may actually shut them out from participating in the growth of many of America’s fastest-growing companies.

But there’s even more to the market dysfunction hurting investors and companies.

In 2004, at the age of 92, the late Sir John Templeton, a pioneer in the world of mutual funds, issued a stark warning to investors. “The stock market is broken,” he said in an interview. He went on to predict the housing bubble would spark the sort of terrible market crash we witnessed four years later. But Templeton saw a bigger problem than just the bubble then emerging. Stock markets are now dangerously short-sighted. “Mass media, especially TV today, is so short-term that few in its audience grasp the lasting damage and corrective impact which will continue to linger from the greatest financial crash in world history,” he said. In the wake of that very crash, short-term thinking is as much a problem as ever before.

The stats behind investors’ amputated attention spans are astonishing, and reveal the damage caused to the wider economy. According to the New York Stock Exchange, in the 1960s the holding period for stocks was eight years. By 1990 it had fallen to two years and today the average stock is held for just nine months. As investors have shortened their time horizons, companies have been focused on each next quarter’s financial results at the expense of the next decade, say experts. Last spring, the U.S. Senate banking committee held hearings to examine the plague of short-term thinking in capital markets. Some astonishing revelations emerged. In a survey of 400 chief financial officers, 80 per cent said they’d cut research and development spending to goose short-term performance. To make matters worse, when companies do beat expectations, executives are lavished with huge paycheques and millions of stock options that dilute existing shareholders even further.

One reason investor time horizons have shrunk so dramatically is that hedge funds have been taking massive gambles using borrowed money, says Cohan. “One of the biggest sources of volatility is hedge funds betting on very short-term movements,” he says. “That whole dynamic is not really conducive to long-term investing, or the long-term management of companies.”

The same can be said for much of what goes on in the stock market these days. At precisely 2:45 on May 6, 2010, U.S. indices plunged nine per cent, temporarily wiping out US$1 trillion of market value, before recovering several minutes later. For many regular investors, it was their first painful introduction to the volatile world of high-frequency trading. HFT firms earn billions betting on stocks as they move up and down by fractions of a penny. A typical high-frequency trader owns a stock for just nine seconds. The problem is, should markets drop abruptly, the complex computer algorithms used by HFT firms can make matters worse.

The same goes for the rise of another Wall Street creation, exchange-traded funds—mutual funds that trade as stocks. While ETFs are pitched as a safe, low-cost way to invest, critics say the nearly US$1-trillion segment poses a systemic risk to investors in the event of another flash crash, since the inevitable rush by ETF managers to sell their holdings will drive markets down further.

For those in the burgeoning secondary market for private company shares, like SecondMarket, this all points to increased demand for their services. “There are problems in the public markets that are not going away,” says Mark Murphy, a spokesman for SecondMarket. “If they can avoid having to deal with high-frequency trading, short-term thinking and Sarbanes-Oxley, private company CEOs are saying they’d rather stay private and build something long-term.”

What’s the solution to all this then? In the eyes of some, we must tempt investors to hold their shares longer. U.S. legislators have looked at measures such as bigger tax breaks on capital gains for longer-term investors. Meanwhile, Lo at MIT offers the radical proposal—license retail investors to educate and protect them. “In the same way there was democratization in travel when the car was invented, at some point they put in mechanisms to protect people from each other, like stop signs, traffic lights and certification for drivers,” he says. “We had a tremendous period of financial innovation; now it’s time to figure out what protections we need to impose to make the investing highways more safe. Maybe people should pass tests to show we can manage our retirement well.”

In the meantime, the market will remain a dangerous place, not just for companies, but especially for regular investors. Which is why Cuban stresses to investors that they should avoid what Wall Street is selling. “There should be warning labels with every stock purchase,” he told Maclean’s. “Dear Sir or Madam?.?.?.?Before you place this order, please press the button that says ‘I know the person on the other side of the trade probably has spent far more time and money to understand this stock than I have and I am okay with that.’ ” Or, as he wrote on his blog last fall, “The stock market is still for suckers?.?.?.?you should put your money in the bank.”

The last few weeks of 2010 brought a flurry of new lawsuits against Wall Street’s heavy hitters, as lawyers for the victims of Bernard Madoff’s Ponzi scheme raced against a Dec. 11 legal deadline marking two years since the financier’s arrest. Among the big names targeted in the fresh batch of lawsuits are JPMorgan Chase, UBS, HSBC, Citigroup and Merrill Lynch-Bank of America.

The banks have called the lawsuits “unfounded” and “utterly baseless.” But Irving Picard, the court-appointed trustee who’s spearheading the effort to recoup defrauded investors’ money, says it’s Madoff’s financial activity that bore little resemblance to reality—and big banks should have known. The lawsuit against HSBC alleges the bank failed to notice that some of Madoff’s trades had been settled on a Saturday, when stock markets are closed, and that for three years his investor statements misnamed a fund in which he claimed to have put client money. HSBC did hire an independent auditor to look at Madoff’s deals, and the probes warned of possible shams and fraud. But the bank is accused of turning a deaf ear.

The accusations echo the class-action suit that hit Royal Bank of Canada earlier last year for allegedly failing to flag suspicious movements in former Montreal financial adviser Earl Jones’s RBC account. The collapse of Jones’s fund cost his investors around $50 million.

But whether victims in both cases will be able to dig into the defendants’ deep pockets remains to be seen. Neither RBC nor the U.S. banks involved in the Madoff affair advised investors to put money in the schemes. Insinuating that the banks must have known of the scams, moreover, does not carry the same weight as saying that they did know, which might be impossible to prove. Investigations into big bank bankruptcies in the U.K., for example, merely found evidence of poor management and excessive risk-taking, which isn’t actionable or illegal.

At the very least, these legal crusades are showing how complicated a process resolving the Madoff affair will be, and a lot of parties who may or may not bear any culpability could get smeared along the way.

Canada has one of the lowest risks of terrorism in the Western world, according to the recently published 2010 Terrorism Risk Index. Yet this year was also one of the busiest on record for those offering insurance against terrorism, according to Marsh Canada, the country’s largest insurance broker offering terror coverage.

Canada’s terrorism insurance industry dates back to 2001, when the Sept. 11 attacks on the World Trade Center cost insurers $40 billion. After that, most insurance companies in the Western world excluded acts of terrorism from their coverage. The U.S. and the U.K. responded by promising to back companies that continued to offer terrorism coverage as part of their regular policies. Canada (with the exception of a temporary reprieve for the airline industry) did not follow their lead. That meant worried companies had to find their own stand-alone insurance. Following Sept. 11, just over a quarter of Marsh’s clients bought the insurance.

Then, in 2006, news broke of the plot by the so-called “Toronto 18” to attack downtown Toronto and Parliament Hill. “Right after they were busted, we got a lot more uptake,” says Marsh’s terrorism expert Daniel Galvao. Forty-nine per cent of Marsh’s clients bought terrorism insurance in 2006—the most ever. Then companies became less cautious again. By 2008, just a third were buying policies. However, since then, purchases of terrorism insurance have increased again. Marsh estimates 15 per cent more of their clients bought coverage in 2010 than they did two years ago.

That’s not because there’s more terrorism activity, but because two high-profile events were held in Canada—February’s Vancouver Olympics and June’s G20 summit in Toronto. In fact, there was so much demand for coverage during the G20 summit that Marsh couldn’t find enough insurers to take on all the risk. Another sector where companies are concerned today is the energy industry, says Galvao. Terrorists could bomb gas pipelines in the West or transmission lines in the East which feed the U.S. “If you turn off the taps in the middle of the winter, you have very serious consequences.”

]]>To mark its 225th anniversary, the University of New Brunswick hosted a discussion on the future of higher education Monday evening. Joining four of the province’s university leaders was Alex Usher, a Toronto based education consultant, who said Canadian universities have created a “monster” with the way professors are compensated.

He said that Canadian university professors are paid more than their public counterparts in the United States and that far too many resources have been diverted from teaching and into research. “Someone at some point is going to have to break that cycle,” he said.

To cope with an aging population, fewer domestic students, and shrinking government grants, Usher offered three suggestions. Universities need to train students who contribute to the economy, control costs by increasing class sizes and mandating a uniform curriculum, and diversify their incomes sources by recruiting more international students or setting up satellite campuses overseas.

A U.S. investigation into illegal insider trading continues to gather steam amid reports this week that the FBI raided the offices of three hedge funds, one of which has links to an ongoing probe of Galleon Group, described as the largest hedge fund insider trading case ever. In Canada, meanwhile, the Ontario Securities Commission levelled its own stock- tipping allegations against Mitchell Finkelstein, a lawyer formerly at Davies Ward Phillips & Vineberg LLP, as well as several traders and brokers who allegedly profited from inside information about corporate deals.

But while white-collar crime investigations in the U.S. have often led to criminal charges, experts say that, if past history is any indication, the Canadian case is unlikely to result in jail time. Richard Powers, associate dean of the Rotman School of Management, says proving stock tipping in the criminal courts is extremely difficult in Canada, and that the OSC may be inclined to seek administrative penalties such as fines and trading sanctions because they require a much lower burden of proof. “My sense is that’s what is happening here—lots of phone calls, innuendo and timing points to tipping, but does it meet the criminal standard required for more severe penalties? Only the OSC knows at this point.”

]]>The recession has left Canadian universities with a combined pension deficit of $2.6 billion, according to a Globe and Mail survey of more than 20 institutions. The consequence of the shortfall will likely be reduced services for students, the paper reported. For example, Dalhousie University is facing a solvency deficit of $129 million that will have to be filled by taking funds from the operating budget. Nova Scotia denied the university’s request to exempt it from solvency regulations, instead giving the school 10 years, as opposed to the usual five, to restore funds to the pension plan. Similar situations exist at universities right across the country, with pension plan solvency deficits ranging from a high of $1.1 billion at the University of Toronto to a low of $9.2 million at Trent University.

The global economic downturn destroyed the image of big finance, but did nothing to tarnish that of microfinance, the altruistic business of making tiny loans to small entrepreneurs in developing countries. Recently, though, even microlending appears to be headed toward its own mini financial crisis.

Once hailed as a magic bullet against poverty, the practice has come under attack in India and Bangladesh where it is being accused of increasingly adopting the same loansharking methods that it is meant to rescue small borrowers from, like punishing interest rates. The backlash first originated in India, where a wave of suicides by farmers with outstanding microloans led local authorities to rein in financiers. Similarly, in neighbouring Bangladesh—the birthplace of the global microlending movement—regulators are planning measures that include an interest rate cap.

Microfinance firms deny wrongdoing, saying that charging hefty interest rates (usually around 30 per cent) is necessary to cover servicing costs in remote villages. But microfinance founder and Nobel Peace Prize winner Muhammad Yunus has been warning that high growth and high profits have been corrupting the industry. The concept of microcredit, he told the Wall Street Journal, “is being blatantly abused.”

]]>University of Calgary faculty and staff are bracing for what will be a “bloody” budget next year, according to one professor. In fall 2009, the university projected a $47.5 million deficit for 2013-14, a staggering figure that U of C administrators have already cut by more than half.

An administrative review, itself costing $30 million, helped the university find $10 million in savings, largely by eliminating 140 jobs ($8 million) and finding efficiencies with suppliers, utilities and administrative costs ($2 million). An additional $4 million is expected to be generated this year, growing to $12 million by 2012-13, through a new student ancillary fee. With an endowment fund that has recovered from a recessionary slump, projected shortcomings have been reduced to a $21.7 million deficit.

“The deficit we were looking at (for that projection) is not the deficit we’re going to have to deal with,” Jack Gebert, U of C’s vice-president finance told the Calgary Herald. Gebert says he plans to bring forward a fully balanced budget in the spring, despite the fact that the province will not be increasing the university’s operating grant.

The university has been in negotiations with support staff since March, and collective bargaining with faculty will begin in the new year. The university’s aggressive budget balancing has some faculty and staff concerned.

“I think next year’s going to be bloody . . . I think that there’s going to be a lot of pressure to reduce (support) staff. Staff always gets the worst deal because they don’t have the protection that faculty have. I think there will be a lot of very tough decisions. We’re already running skeletal crews,” art history prof David Bershad, said in the Herald.

]]>The crushing recession that’s brought Ireland to its kneeshttp://www.macleans.ca/news/world/no-more-pot-of-gold/
http://www.macleans.ca/news/world/no-more-pot-of-gold/#commentsWed, 17 Nov 2010 15:00:05 +0000http://www2.macleans.ca/?p=158041With 14 per cent unemployment and its banks on the brink, the Celtic Tiger is now more like a sickly kitten

One in three Irish under 30 are out of work | Cathal McNaughton/Reuters

Two years ago, Mick Doherty was tooling around Dublin in a brand new, cherry-red Audi A4. “A six-speed,” the young Irishman adds, with a rueful smile. Today, Doherty drives around his adopted Vancouver in a 1990 Chrysler Daytona—automatic transmission. “And I’m grateful for it,” declares the 32-year-old construction worker who, last year, emigrated to Canada to escape a crushing recession that’s brought his native Ireland to its knees. It’s shrunk the economy by a tenth—the textbook definition of a depression.

What a difference a few years can make. As recently as 2006, the roaring Celtic Tiger was held up as a model economy. Doherty was making money hand over fist, holidaying three times a year, in Bulgaria, Las Vegas, Spain. Ireland famously boasted more BMWs per capita than Germany, and its lawyers and managers were earning bigger bucks than their counterparts in the U.S. But in late September 2008, Irish banks, overexposed to the property market, came under severe pressure as the credit crunch bit in. “More or less overnight,” says Doherty, “everything came crashing to a halt.” Ireland led Europe into recession.

Within weeks, his boss had laid off all but seven of 140 carpenters, Doherty included. He spent a year on the dole before leaving for Vancouver. He was joined, in June, by his girlfriend Lisa O’Hagan, 21, and her friend Steven Gormley, 23, both teachers, newly graduated from university. With a freeze on new teaching hires in Ireland’s schools—part of austerity measures brought in to tackle the gaping budget hole—there were no prospects for the foreseeable future, O’Hagan explains. Asked how many among their 10 closest friends had found work since graduation, neither could name a single person. Finding work now takes “years,” Gormley adds. “You sit around and wait, or you leave.” With unemployment topping 14 per cent, and the most brutal budget in the country’s history set to be unveiled next month, many are doing just that. In the next year alone, 120,000 Irish are expected to emigrate.

There’s no end in sight to the country’s woes. Debt continues to pile up, as Ireland is forced to keep shovelling money at its zombie banks. With a deficit set to reach a mind-boggling 32 per cent of gross domestic product this year, the erstwhile tiger could soon join Greece at the centre stage of Europe’s debt crisis. Many economists are predicting a lost decade is in the offing.

Such talk was unimaginable even three years ago, when Ireland was still booming, and foreign investment was pouring in, eager to take advantage of Ireland’s rock-bottom corporate tax rates, highly-educated, English-speaking workforce, and easy access to European markets. Many of the world’s biggest names in computing and pharmaceuticals set up shop: Microsoft, Apple, Intel, Pfizer. By 2000, Ireland had become the world’s leading software maker, and was boasting nine per cent annual growth, higher than any other developed country. The country was transformed. The Irish, in what economist David McWilliams dubbed the “Wonderbra effect,” were squeezed into the middle, and lifted—the developed world’s most significant social compression of the past half-century. “It’s not so much that the rich got richer,” he says. “Everybody got richer.”

But lurking beneath was what will soon be seen as the biggest property bubble in modern history, says Pete Lunn, an economist with Dublin’s Economic and Social Research Institute. Irish banks had gone on overseas “borrowing sprees,” and were handing out no-money-down mortgages hand over fist, says Brian Lucey, who teaches finance at Trinity College School of Business. The economy was swept up in a construction frenzy. The sector employed one in four Irish men.

Tax breaks on housing and development poured fuel onto the fire. And the country’s inclusion into the euro robbed government of the ability to raise interest rates to dampen the white-hot economy. By 2004, the International Monetary Fund and the Organisation for Economic Co-operation and Development (OECD) had begun flashing warning lights—which grew increasingly “redder, and flashier,” with each passing year, says Lucey. By 2007, the height of lunacy, Ireland’s household debt was at 191 per cent of household income (by way of comparison, it hit 130 per cent in the U.S. that year). A family home in Dublin cost as much as in Beverly Hills. Mortgages worth 10 times average earnings were commonplace.

By then, Ireland’s banks held frightening amounts of debt, none more than Anglo Irish, currently Ireland’s sickest bank. Between 1998 and 2008, Anglo’s loan book rose from $4 billion to $103 billion: half the country’s GDP. The global credit crunch shook the country’s banking sector, which had lent, usually without collateral, an amount equal to two-thirds of gross national product to property developers, Dublin economist Morgan Kelly has noted. Bank share prices began falling in March 2007, coming to a head by the next fall. Dublin would later nationalize Anglo, and try to rescue its rivals through the establishment of a “bad bank”: the state-run National Asset Management Agency (NAMA), taking the banks’ most toxic assets off their balance sheets. Already, Dublin has committed to spending $100 billion—10 times per head the amount the U.S. spent rescuing its banks, says Kelly. The banks, however, remain “extremely” ill, and in need of further help, Lucey notes.

The Irish, who have seen housing prices drop by 50 per cent, have shouldered austerity measures with typical stoicism, yet deeply worrying signals abound. One in three Irish under 30 are out of work. Last year, the suicide rate jumped by 40 per cent. The “Troubles” are thought to be returning to Northern Ireland, where the number of unemployed has risen by 146 per cent in the past three years: in 2009, the number of gun attacks by dissident terrorists shot up by 54 per cent in the British province.

Next month, Ireland’s Finance Minister Brian Lenihan will for the first time table a four-year budget. It’s going to be “horrendous,” says Lucey—“it has to be,” he adds. It is a critical moment. Ireland is the next-riskiest borrower in Europe, after Greece. In order to convince investors it can emerge from the mess, the government will have to take the chainsaw to the public rolls once again. (Salaries for nurses, professors and other public sector workers have already been cut by 20 per cent, says Lunn. His own salary is down 15 per cent.) The hope is that, by coming up with a credible fiscal plan, the country can cap concerns that it’s on the verge of a Greek-style debt crisis.

This fall, both the IMF and European Union have been forced to deny reports that Ireland will be bailed out with aid money. But the option, says Lucey, is “no longer by any means unthinkable.” Investor anxiety has increased in step with the growing tab for the banks’ bailout. Since spring, the final tally has been repeatedly upwardly revised, as hidden debts continue to emerge. Any further spooking of the bond markets will send Dublin begging, Lunn figures. At stake, he admits, is severe reputational damage. While Greece is one of Europe’s most closed economies, the export-dependent Irish economy is among its most open. “But what price reputation?” Lunn asks, apparently resigned to the possibility. “Reputation,” he adds, “doesn’t put food on the table or cheques in the post for public services.”

]]>http://www.macleans.ca/news/world/no-more-pot-of-gold/feed/2Generation spendhttp://www.macleans.ca/education/uniandcollege/generation-spend-2/
http://www.macleans.ca/education/uniandcollege/generation-spend-2/#commentsMon, 08 Nov 2010 22:11:48 +0000http://oncampus.macleans.ca/education/?p=18086Today’s youth are set to become bigger consumers than the boomers

]]>“If I want something I want it, no matter what,” says Kezia, one of the protagonists of a new Slice TV series Princess, where Til Debt Do Us Part host Gail Vaz-Oxlade tries to put young, female serial shoppers through personal finance rehab. A makeup artist who normally makes “probably” around $30,000 a year, Kezia would shed up to $355 a month on her hairdo, and eat out “probably” four times a week. “I don’t ever look at my credit card statements,” the pretty (dyed) blond says, gazing dreamingly at the camera. “As soon as they come, I throw them away.”

Twenty-five-year-old Kezia belongs to a new species of consumer whose capacity to spend will surpass that of the boomers sometime in the next decade. Variously referred to as Generation Y or Generation Next, they are loosely defined as the age group going from kids in their early teens to young adults. In the U.S., eight- to 24-year-olds are expected to spend $224 billion of their projected $348 billion annual income, according to Harris Interactive, a market research and consulting firm. Yet the percentage of those who have no savings at all is over 50 per cent. The stats in Canada are equally troubling. For young adults, the proportion between the ages of 25 and 34 who say they are impulsive spenders and can’t save is 30 per cent, a figure very similar to the 31 per cent found among the so-called Generation X (or 35- to 49-year-olds), according to a recent study by the Royal Bank of Canada.

The recession was supposed to teach some important lessons about saving and living frugally, but Generation Y seems poised to fall into similar spending habits that left their parents with crippling debt. Whereas the financial crisis raised the national savings rate in the U.S. from a low of less than two per cent in 2007 to over eight per cent in mid-2009 (it is now at around five per cent), in Canada it edged up from 2.8 per cent on average three years ago to a still very modest 4.4 per cent overall this year. Despite this small effort to repair household balance sheets, four in 10 Canadians say they struggle to put a nickel in the piggy bank, according to RBC. It’s an unsettling trend for those preaching financial good sense.

How then to raise a breed of conscientious spenders and good savers (if not by example)? Part of the answer, say experts, is coming from financial institutions trying to stage a digital catch-up to the marketing industry that has so effectively targeted young spenders. Most savings products, says Dilip Soman at the University of Toronto’s Rotman School of Management, have “supremely boring advertising.” On the other end of the spectrum of the battle for young wallets, however, are marketing firms with a sophisticated arsenal of advertising tools. Their methods range from social networking sites like Facebook and Twitter to guerrilla-style campaigns that use the power of peer pressure to encourage spending. (In one campaign for Neutrogena, for example, 4,000 high school girls were recruited to work as “brand evangelizers,” pitching the product to classmates and friends in exchange for prizes including concert tickets.)

Simple financial behaviours like saving, or making rational decisions about limited resources, must be embedded in a language young people understand—the same language that speaks to them about PlayStations and Coach bags, say experts. A group of U.S. researchers has had good results, for instance, by having young people interact with digital, retirement-age avatars of themselves as they make hypothetical savings decisions. In one case study, the expression on the avatars’ faces would display a smile or an unhappy grimace depending on the positive or negative impact of the savings decisions on the participants’ future financial situation. In all cases, the study says, participants who interacted with their aged avatars showed a greater propensity to forgo the instant pleasure of spending for the delayed pleasure of having and using savings in the future.

Another way to go about this is finding “smart ways of leveraging social networking,” says Alessandro Previtero at the University of Western Ontario’s Richard Ivey School of Business. He says young people might find it easier to set and reach financial targets if they use something like StickK.com, a website designed by a team at Yale that helps people achieve their goals (from losing weight to quitting smoking) by, among other things, getting their friends involved. Much like friends on Facebook, supporters on StickK.com receive regular updates on status changes—in this case, a person’s progress toward the stated goal. If constructive use of peer pressure helps people shed their extra pounds or their pack of cigarettes, it could also help them save, says Previtero.

And whether the lesson comes from social networking or old-fashioned parenting, teaching youngsters how to set financial goals is key, says Patricia Domingo, an investment retirement planner at RBC. She recalls setting up a savings account and a guaranteed investment certificate for a 15-year-old who made $8,000 designing and selling a website. The parents, she said, sat him face to face with the family financial adviser so he’d be forced to think about what he should do with the money.

Other healthy practices, says Greg Holohan, an investment executive at ScotiaMcLeod, include openly discussing family income, utility bills and even investment strategies with the kids; encouraging them to use their allowance or summer job money to pay for some of their needs; and refusing to pay for everything. A good strategy, he says, might also be to tell the young ones that they have to pay for part of their college and university costs, but then reward them afterwards by paying them back and giving them a tidy sum to start with as they enter the job market.

Deborah Beedie, an account executive in Dundas, Ont., thinks she got it right. “Our kids can probably tell you how much we make, what we have in terms of investments and what bills come up when,” she says of sons Michael, 20, and Scott, 14. Whenever Scott gets his weekly allowance of $14 (one dollar per every year since he was born), he has to decide how much to put in one of three jars labelled “savings,” “spending” and “other.” Michael, a junior at Dalhousie University, had tuition, books and rent paid for, but must use summer job money to sustain his social life and contribute to food expenses. Apparently, he now has the grocery store mapped out according to product pricing and won’t even go near the middle of the alley where, he says, the more expensive stuff is on display.

Whether it’s trying to protect your kid from slick online marketing or the corner street dealer, says Beedie, all you can do is “have a value system that you can transmit”—leave the kids autonomy but know what they’re up to, and hope for the best.

]]>http://www.macleans.ca/education/uniandcollege/generation-spend-2/feed/2Generation spendhttp://www.macleans.ca/economy/business/generation-spend/
http://www.macleans.ca/economy/business/generation-spend/#commentsMon, 08 Nov 2010 14:00:55 +0000http://www2.macleans.ca/?p=156217Today’s youth are set to become bigger consumers than the boomers

“If I want something I want it, no matter what,” says Kezia, one of the protagonists of a new Slice TV series Princess, where Til Debt Do Us Part host Gail Vaz-Oxlade tries to put young, female serial shoppers through personal finance rehab. A makeup artist who normally makes “probably” around $30,000 a year, Kezia would shed up to $355 a month on her hairdo, and eat out “probably” four times a week. “I don’t ever look at my credit card statements,” the pretty (dyed) blond says, gazing dreamingly at the camera. “As soon as they come, I throw them away.”

Twenty-five-year-old Kezia belongs to a new species of consumer whose capacity to spend will surpass that of the boomers sometime in the next decade. Variously referred to as Generation Y or Generation Next, they are loosely defined as the age group going from kids in their early teens to young adults. In the U.S., eight- to 24-year-olds are expected to spend $224 billion of their projected $348 billion annual income, according to Harris Interactive, a market research and consulting firm. Yet the percentage of those who have no savings at all is over 50 per cent. The stats in Canada are equally troubling. For young adults, the proportion between the ages of 25 and 34 who say they are impulsive spenders and can’t save is 30 per cent, a figure very similar to the 31 per cent found among the so-called Generation X (or 35- to 49-year-olds), according to a recent study by the Royal Bank of Canada.

The recession was supposed to teach some important lessons about saving and living frugally, but Generation Y seems poised to fall into similar spending habits that left their parents with crippling debt. Whereas the financial crisis raised the national savings rate in the U.S. from a low of less than two per cent in 2007 to over eight per cent in mid-2009 (it is now at around five per cent), in Canada it edged up from 2.8 per cent on average three years ago to a still very modest 4.4 per cent overall this year. Despite this small effort to repair household balance sheets, four in 10 Canadians say they struggle to put a nickel in the piggy bank, according to RBC. It’s an unsettling trend for those preaching financial good sense.

How then to raise a breed of conscientious spenders and good savers (if not by example)? Part of the answer, say experts, is coming from financial institutions trying to stage a digital catch-up to the marketing industry that has so effectively targeted young spenders. Most savings products, says Dilip Soman at the University of Toronto’s Rotman School of Management, have “supremely boring advertising.” On the other end of the spectrum of the battle for young wallets, however, are marketing firms with a sophisticated arsenal of advertising tools. Their methods range from social networking sites like Facebook and Twitter to guerrilla-style campaigns that use the power of peer pressure to encourage spending. (In one campaign for Neutrogena, for example, 4,000 high school girls were recruited to work as “brand evangelizers,” pitching the product to classmates and friends in exchange for prizes including concert tickets.)

Simple financial behaviours like saving, or making rational decisions about limited resources, must be embedded in a language young people understand—the same language that speaks to them about PlayStations and Coach bags, say experts. A group of U.S. researchers has had good results, for instance, by having young people interact with digital, retirement-age avatars of themselves as they make hypothetical savings decisions. In one case study, the expression on the avatars’ faces would display a smile or an unhappy grimace depending on the positive or negative impact of the savings decisions on the participants’ future financial situation. In all cases, the study says, participants who interacted with their aged avatars showed a greater propensity to forgo the instant pleasure of spending for the delayed pleasure of having and using savings in the future.

Another way to go about this is finding “smart ways of leveraging social networking,” says Alessandro Previtero at the University of Western Ontario’s Richard Ivey School of Business. He says young people might find it easier to set and reach financial targets if they use something like StickK.com, a website designed by a team at Yale that helps people achieve their goals (from losing weight to quitting smoking) by, among other things, getting their friends involved. Much like friends on Facebook, supporters on StickK.com receive regular updates on status changes—in this case, a person’s progress toward the stated goal. If constructive use of peer pressure helps people shed their extra pounds or their pack of cigarettes, it could also help them save, says Previtero.

And whether the lesson comes from social networking or old-fashioned parenting, teaching youngsters how to set financial goals is key, says Patricia Domingo, an investment retirement planner at RBC. She recalls setting up a savings account and a guaranteed investment certificate for a 15-year-old who made $8,000 designing and selling a website. The parents, she said, sat him face to face with the family financial adviser so he’d be forced to think about what he should do with the money.

Other healthy practices, says Greg Holohan, an investment executive at ScotiaMcLeod, include openly discussing family income, utility bills and even investment strategies with the kids; encouraging them to use their allowance or summer job money to pay for some of their needs; and refusing to pay for everything. A good strategy, he says, might also be to tell the young ones that they have to pay for part of their college and university costs, but then reward them afterwards by paying them back and giving them a tidy sum to start with as they enter the job market.

Deborah Beedie, an account executive in Dundas, Ont., thinks she got it right. “Our kids can probably tell you how much we make, what we have in terms of investments and what bills come up when,” she says of sons Michael, 20, and Scott, 14. Whenever Scott gets his weekly allowance of $14 (one dollar per every year since he was born), he has to decide how much to put in one of three jars labelled “savings,” “spending” and “other.” Michael, a junior at Dalhousie University, had tuition, books and rent paid for, but must use summer job money to sustain his social life and contribute to food expenses. Apparently, he now has the grocery store mapped out according to product pricing and won’t even go near the middle of the alley where, he says, the more expensive stuff is on display.

Whether it’s trying to protect your kid from slick online marketing or the corner street dealer, says Beedie, all you can do is “have a value system that you can transmit”—leave the kids autonomy but know what they’re up to, and hope for the best.